Audit and Corporate Governance Committee

To: All Members of the Audit & Corporate Governance Committee Councillors: Chair – C Fitzsimmons Deputy Chair – C Froggatt B Axcell, K Buckley, D Friend, J Hart, D Keane, I Marks, S Parish, M Smith and P Warburton

Audit and Corporate Governance Committee Date: Thursday, 17 January 2019

Time: 18:30

Venue: Council Chamber, Town Hall, Sankey Street, Warrington, WA1 1UH

Contact Adam Kellock, Democratic Services Officer – Telephone: (01925) 442142, Fax:

(01925) 656278. Email: [email protected]

Note – In line with The Openness of Local Government Bodies Regulations 2014 this meeting may be recorded.

A guide to recording meetings has been produced by the Council and can be found at

https://www.warrington.gov.uk/info/201104/council_committees_and_meetings/1003/access_to_council_me

etings

AGENDA

Part 1

Items during the consideration of which the meeting is expected to be open to members of the public (including the press) subject to any statutory right of exclusion.

Professor Steven Broomhead Chief Executive

Town Hall Sankey Street

Warrington WA1 1UH

1

mailto:[email protected]

Universal Credit Briefing for Members - 6.15pm

1 Apologies To record any apologies received.

2 Code of Conduct - Declarations of Interest Relevant Authorities (Disclosable Pecuniary Interests) Regulation 2012 Members are reminded of their responsibility to declare any disclosable pecuniary or non-pecuniary interest which they have in any item of business on the agenda no later than when the item is reached.

3 Minutes To confirm the minutes of the meeting held on 16 October 2018 as a correct record.

5 - 10

4 Review of Ombudsman Complaints - 2017/18 Report of the Head of Legal and Democratic Services and Monitoring Officer.

11 - 36

5 Chartered Institute of Public Finance and Accountancy Standards on Professional Practice on Ethics Report of the Deputy Chief Executive and Director of Corporate Services.

37 - 280

6 Risk and Insurance Update for Quarter 2 - 2018/19 Head of Internal Audit, Risk and Insurance.

281 - 296

7 Peer Review of Risk Management Head of Internal Audit, Risk and Insurance.

297 - 314

8 Progress Report of the Officer Governance Group Report of the Deputy Chief Executive and Director of Corporate Services.

315 - 320

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Part 2

Items of a “confidential or other special nature” during which it is likely that the meeting will not be open to the public and press as there would be a disclosure of exempt information as defined in Section 100I of the Local Government Act 1972. Nil.

9 Write off unrecoverable debt Report of the Deputy Chief Executive and Director of Corporate Services.

321 - 328

10 Write off unrecoverable Council Tax debt Report of the Deputy Chief Executive and Director of Corporate Services.

329 - 332

11 Approval of National Non Domestic Rates 1 (NNDR1) Form Report of the Deputy Chief Executive and Director of Corporate Services.

333 - 342

12 2019/20 Council Tax Base Report of the Deputy Chief Executive and Director of Corporate Services.

343 - 348

13 Certification Letter Report of the External Auditors, Grant Thornton.

349 - 352

14 Work Programme 2018-19 Report of the Chair of the Audit and Corporate Governance Committee.

353 - 356

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AUDIT AND CORPORATE GOVERNANCE COMMITTEE 16 October 2018

Present: Councillor C Fitzsimmons (Chair). Councillors: B Axcell, K Buckley, D Friend, C Froggatt, J Hart, I Marks, S Parish, M Smith and P

Warburton Also present: S Bleckly (Audit Manager), M Cumberbatch (Head of Legal and Democratic

Service – Monitoring Officer), J Gleave (Chief Internal Auditor), L Green (Director of Corporate Services), S Iqbal (External Auditor – Grant Thornton), G Winstanley (External Auditor – Grant Thornton).

ACG 24 Apologies Apologies were received from Councillor D Keane. ACG 25 Code of Conduct – Declarations of Interest There were no declarations of interest made. ACG 26 Minutes The minutes of the meeting held on 26 July 2018 were presented to the Committee. Decision That the minutes of the meeting held on 26 July 2018 be agreed as a correct record. ACG 27 Annual Risk Management and Insurance 2017/18 The Annual Report on Risk Management and Insurance for the 2017/18 financial year which provided the full position as of the end of the year was presented by the Chief Internal Auditor. The report had previously been presented to the Executive Board and the majority of risks remained stable which was as expected as they were strategic risks so were unlikely to move a great deal. The number of risks recorded on the register had increased, mostly due to a split in the social care risks and continued high levels pressures on the wider social care service. Increase in risks recorded on the register, split in social care risks, pressure on high level care. Figure 2 is the profile of the high scoring risks. Each directorate had been asked to provide updates on their control strategies related to the risk outlined in the register.

Item 3

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A peer review of the risk management arrangements had been carried out and a report on the outcome of the review would be reported to the next meeting of the committee. The overall opinion was that the risk management arrangements were well designed. Insurance claim activity for the year was outlined within the report with the arrangements with Salford Council continuing. The types of claims and number were outlined at paragraph 5.5 of the report with the majority of claims of low value. Claims relating to highways were often defendable under the Highways Act and none had been paid out during the previous financial year. Robust investigations of insurance claims were carried using the resources available with the team based at Salford Council. In response to a query regarding the Time Square development it was noted that currently the risk register considered risks relating to the completion of the project rather than the financial risks associated with occupancy rates. It was clarified that the position statement at quarter two would include the updated underlying risks which had been refreshed for the scheme to provide a fuller picture. A further query was raised about the small number of claims paid out for highways issues. It was noted that as the Council had good processes in place around maintenance and repairs the Council was in a better position to defend claims that are submitted. Further queries were raised with regards to social care, the Great Sankey Hub, Stadium Quarter Development and the risk of a potential legal challenge to the local plan. Members were informed that risks were continually review and refreshed to ensure that they were up to date and provided the best possible assurance. Decision That the committee notes the annual review of risk and insurance management activity for 2017/18. ACG 28 Audit and Corporate Governance Committee Self-Assessment and Review of

Effectiveness The Head of Internal Audit, Insurance and Risk presented the findings report of the annual self-assessment of the effectiveness of the Audit and Corporate Governance Committee. The appendix to the report which contained the feedback from the three members that participated in the review was circulated to members of the committee. Members agreed that the Committee continued to run effectively and highlighted areas such as progress reports from auditors and updates on the implementation of actions as areas for improvement moving forward. The below actions points were noted:

To continue to include review of key partnership governance arrangements in the Committee work programme. Requirement to understand partners’ risks and the

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effect on the Council. The annual report of the officer Governance Group to include detail of partnership governance arrangements.

Continue to review Terms of Reference on an annual basis and link to review of Terms of Reference for all committees, and liaise with Chairs of other Committees as appropriate. In particular:

- receive update and review the role of the Treasury Management Advisory Board

- liaise with Scrutiny Committee and Health Scrutiny Committee

Continue to hold strategic seminars on key issues as decided by Members of the Committee.

Include role of the Audit & Corporate Governance Committee in Member training.

Invite managers to attend committee meetings to discuss particular reports and risk areas as required and to ensure that actions are implemented as required.

Committee to support the appointment of an independent member in accordance with CIPFA guidance.

Continue to monitor reports to ensure that they are fully accessible. Decision That the Audit and Corporate Governance Committee approves the completed self-assessment document and the evaluation of the effectiveness of the Committee and notes the action points to be taken. ACG 29 Anti-Fraud, Bribery and Corruption Update The Audit Manager provided members with the six monthly report which aimed to provide the committee with an update on the work being done by the Council to minimise the risk of fraud, bribery and corruption. The review is carried out on a regular basis and areas identified as amber in the last review were highlighted with the actions being taken detailed. The review was based on the Fighting Fraud and Corruption Locally checklist and the Council was fully compliant with this guidance. In terms if whistleblowing it was noted that a self-assessment was carried out and the Council was above average for most areas, only being slightly below average on engagement as it was noted that a large exercise took place in 2014 but not since then. Actions for how to address the issues raised by the self-assessment were highlighted within the report. Work carried out in the year to date was outlined and had already achieved beyond the amount that had been achieved during the whole of the previous year. The increase in the workload that could be dealt with was the result of working more closely with departments and partners which enabled more referrals to be submitted and investigations to be carried out. Most outcomes were in the social care sector and the team was working closely with social workers and the income recovery team. The main area being looked at was in relation to

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client contributions to social care and a new post in the income recovery team had been established to focus on the recovery of social care debt. There was a generally low number of internal fraud causes. The figures were below average so would continue to be monitored to ensure that the control procedures in place were still correct and effective. Decision That the committee notes the contents of the report. ACG 30 Internal Audit Quarterly Performance Report to 5 October 2018 The quarterly Internal Audit report was presented to the Committee by the Head of Internal Audit, Insurance and Risk to provide members with information on the progress that was being made against the Internal Audit plan for the 2018/19 financial year. The period covered in the report was from 16 July to 5 October 2018. During the period eight reports and memos had been issues with further detailed on the limited assurance opinions that had been issued outlined within Appendix A of the report. Extra work had been completed during the period covering the grant sign off and fraud investigations that was not part of the plan for the year. The Internal Audit team continued to carry on with support to a number of projects throughout the Council with new systems and processes in place. Along with this the team continued to work collaboratively with the Cheshire West and Chester contracts audit around the Time Square development. Follow up work on previously agreed recommendations had been carried out in relation to Time Square and Health and Social Care with more in depth work required to determine where progress had been made. Follow up reports would be completed prior to being brought to the committee. The team would continue to return to audits where limited assurances had been provided or where high or critical recommendations had been made. Audits where medium recommendations would only require comments from managers to confirm. Key Performance Indicators were set out with the percentage of recommendations implemented within the required timescales not being at target so this area was being reviewed. A review that received a limited assurance was relating to building control, particularly cost recovery and income due. One high priority recommendation was in place in terms of the time spent on chargeable activities and a number of medium recommendations had been made relating to income. It was noted that progress had been made with follow up work to take place.

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For Licensing there was a limited assurance in place in relation to income collection and banking. Progress against the recommendations was ongoing and regular progress meetings were taking place with assurance that the work required was being carried out. Follow up work would also be carried out. A previous review received by the committee on Parks and Outdoor Recreation had received a follow up review following the initial review as part of the 2016/17 work plan during which a limited assurance had been provided with a number of recommendations and high risk areas. Work was ongoing around resources and staffing changes with days set aside in the 2018/19 plan to for a follow up review. Decision That the committee notes the report as part of its monitoring role. ACG 31 Internal Audit Charter The Internal Audit Charter was reviewed, updated and brought to the Committee on an annual basis having previously been brought to the Committee in July 2017. The updated charter was attached at Appendix 1 to the report. Only minor changes had been made to the charter since it was last brought to the Committee with changes in job titles, structures, the role of the Monitoring Officer, the role of the Chief Executive and external assurances that are sought. The changes that had been made to the charter were highlighted in yellow on the attached Appendix. Decision That the Committee approves the updated Internal Audit Charter. ACG 32 Internal Audit and Quality Assurance Programme The Internal Audit and Quality Assurance Programme was brought to the Committee on an annual basis to determine how the work of the Internal Audit team was being monitored. Updates from the last time the programme was brought to the Committee were included in the action plan with agreed actions taken from the self-assessment exercise and the external assessment that took place to be included in the programme. Self-assessments were carried out annually and peer reviews every five years to ensure that actions were followed up. The programme aimed to give members assurance that it could rely on the effectiveness of the work being done by the Internal Audit Team. Decision

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That the Committee approves the updated Internal Audit Quality Assurance and Improvement Programme. ACG 33 Work Programme 2018/19 The Committee considered its work programme for the 2018/19 municipal year. It was noted that Warrington had been a pilot area for the introduction of Universal Credit and it was requested that a briefing be provided prior to the next meeting of the Committee to look at how it had impacted on Warrington residents and what the Council could do. A query was raised with regards to Freedom of Information Requests and a report would be added to the work programme. The report would outline the number of requests received, the framework they are in, overall themes, cost associated with dealing with them etc. in comparison to other Local Authorities. Decision That the committee approves its work programme for the remainder of the 2018/19 municipal year.

Signed: …………………………..

Date: …………………………..

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WARRINGTON BOROUGH COUNCIL AUDIT AND CORPORATE GOVERNANCE COMMITTEE – 17 JANUARY 2018 Report of: Matthew Cumberbatch, Head of Legal and Democratic Services and

Monitoring Officer

Report Author: Julian Joinson, Principal Democratic Services Officer Contact Details: Email Address:

[email protected]

Telephone: 01925 442112

Ward Members:

All

TITLE OF REPORT: REVIEW OF OMBUDSMAN COMPLAINTS 2017/18

1. PURPOSE OF REPORT 1.1 To provide information in respect of the Ombudsman complaints received

by the Council in 2017/18 and to analyse any trends or areas of concern. 2. CONFIDENTIAL OR EXEMPT 2.1 The report does not contain information which is either confidential or

exempt. 3. INTRODUCTION 3.1 The Local Government and Social Care Ombudsman (LGSCO) may

investigate complaints against local authorities in England, as well as all adult social care providers (including care homes and home care agencies) and some other organisations providing local public services. Where the Ombudsman finds that a council investigated has done something wrong (“maladministration”) it may make recommendations to as to how it should be put right.

3.2 The LGSCO publishes all decisions on their website although the names of

the complainants are not published. In certain cases where it is not in the complainant's interest, or anonymity may be compromised, the LGSCO can decide not to publish a decision.

3.3 Each year the LGSCO publishes an Annual Review Letter tailored to each

authority, which gives a summary of statistics on the complaints made about that authority for the year ending 31 March. The letter for

Item 4

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Warrington for 2017/18 was published on 18 July 2018 and can be viewed using the following link. https://www.lgo.org.uk/documents/councilperformance/2018/warrington%20council.pdf

3.4 The letter makes clear that the volume of complaints received does not, in itself, indicate the quality of the council’s performance. The raw data included in the letter can only tell a part of the story – the wider outcomes from the complaints received are far more important than the numbers. It is the view of the LGSCO that complaints can be an important learning tool for local authorities and a useful source of feedback about the health of the services provided.

4. COMPLAINTS OVERVIEW 2017/18 4.1 The Annual Review Letter lists the numbers of complaints and enquiries

received for the period 2017/18 by service area, as follows:-

Service Area No. of Complaints

Adult Care Services 9

Benefits and Council Tax 15

Corporate and Other Services 3

Education and Children’s Services 7

Environment Services 7

Highways and Transport 1

Housing 2

Planning and Development 4

Other 0

TOTAL 48

4.2 The highest number of complaints received, 15, was in the category of Benefits

and Council Tax, with Adult Care Services receiving 9 and Education and Children’s Services and Environment Services each receiving 7 complaints. Nationally, Education and Children’s Services receives the greatest number of complaints, with Adult Care Services close behind. It is also worth noting that in the case of Adult Care Services, sometimes an element of the complaint may be in relation to the care provided by a commissioned provider, which can add to the complexity of investigating the issue.

4.3 Chart 1 below shows the complaints received for each service area in

Warrington as a proportion of the total number of complaints. For comparison purposes, Chart 2 shows the same service areas across all Unitary Authorities, Metropolitan Districts and London Boroughs, but does not include figures for local authorities in two tier areas. The charts show that Benefits and Council Tax complaints in Warrington were relatively high (31%) compared to the

12

https://www.lgo.org.uk/documents/councilperformance/2018/warrington%20council.pdf

https://www.lgo.org.uk/documents/councilperformance/2018/warrington%20council.pdf

national average for peer authorities (14%). Complaints received for Highways and Transport and Housing issues in Warrington were significantly lower than for peer authorities. For other service areas the complaints figures were comparable.

Chart 1

Warrington Complaints Received 2017/18

Adult Care Service (19%)

Benefits and Tax (31%)

Corporate and Other Services(6%)

Education and Children'sServices (15%)

Environment Services (15%)

Highways and Transport (2%)

Housing (4%)

Planning and Development(8%)

Other (0%)

Chart 2

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All UA/MD/LB Complaints Received 2017/18

Adult Care Service (14%)

Benefits and Tax (14%)

Corporate and Other

Services (6%)

Education and Children's

Services (19%)

Environment Services

(11%)

Highways and Transport(11%)

Housing (15%)

Planning andDevelopment (10%)

Other (1%)

4.4 The average number of complaints received by authority type (excluding

authorities in two tier areas) is shown in Chart 3 below. The total received in Warrington (48) is lower than the averages across all North West Unitary Authorities and Metropolitan Districts (75) and for all categories of local authority nationally (92). The average number of complaints is greatest for London Boroughs (135).

Chart 3

14

0

20

40

60

80

100

120

140

160

Total Complaints Received by Authority Type 2017/18

Complaints

4.5 Chart 4 below shows that Warrington ranks seventh lowest for complaints

received in comparison to all 21 North West peer authorities. Chart 4

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4.6 The Annual Review Letter also provides figures showing the number and type of

decisions made during 2017/18. The total figure will not necessarily match the total of cases received set out at Paragraph 4.1 above, since some cases from 2016/17 may be finalised in 2017/18 and cases received in 2017/18 may not be recorded as formal decisions, or may not have been determined by the end of the recording period.

Complaints received in 2017/18 48

Add: Complaints from 2016/17 decided in 2017/18 8

SUB-TOTAL 56

Less: Complaints not recorded as a formal decision 6

TOTAL Decisions Made In 2017/18 50

4.7 The types of decisions made in 2017/18 are as follows:-

Decision Type No. of Decisions

Incomplete or Invalid 0

Advice Given 2

Referred back for Local Resolution 22

Closed After Initial Enquiries 14

Detailed Investigations

Not Upheld 3

Upheld 9

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TOTAL 50

4.8 The definitions of the various completed decisions are attached at Appendix 1.

The above figures show that only 12 out of 50 of the complaints reached the stage of a detailed investigation, of which 9 were upheld. Charts 5 and 6 below show that, proportionally, the types of decisions made in relation to Warrington closely match the pattern across peer authorities.

Chart 5

Chart 6

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4.9 Chart 7 below shows that the total for decisions made in relation to Warrington

(50) is lower than the averages across peer authorities. Comparative figures are given, for North West Unitary Authorities and Metropolitan Districts (71) and for all categories of local authority nationally (90). The average number of decision made is greatest for London Boroughs (131). The pattern of decisions made is consistent with the position reported for complaints received.

Chart 7

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4.10 Chart 8 shows the rate for Upheld Decisions following a detailed investigation by

the Ombudsman for Warrington and its peer authorities. The rate for Warrington (75%) is higher than the averages for all authority types, including North West Unitary Authorities and Metropolitan Districts (61%) and across all peer authorities nationally (59%). However, given that the base figure for Warrington is relatively small (only 12 cases), a small number of adverse decisions can give rise to large variations in the percentage upheld figure.

Chart 8

5. COMPARISON ACROSS THE 3 YEAR PERIOD - 2015/16 – 2017/18

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5.1 Work has been undertaken to provide an analysis of the figures regarding

complaints made across the three year period from 2015/16 to 2017/18. Attached at Appendix 2 is a summary schedule of the complaints received and decisions made for each of the three most recent years. The schedule is provided in a similar format to that used in the LGSCO’s Annual Review Letter for consistency and ease of comparison.

5.2 The highest frequencies of complaints received in each year tend to fall within

Adult Social Care, Education and Children’s Services and Environment Services. However, there has been a significant increase in the number of Benefits and Tax related complaints in 2017/18. Numbers of complaints lodged in relation to other service areas have remained relatively consistent and low. The total numbers of complaints received has increased steadily over the three year period from 40 in 2015/16 to 48 in 2017/18 (an increase of 20%).

5.3 In relation to decisions made, most figures have remained stable over the three

year period, with a small but steady increase in the numbers of complaints referred back to the authority for a local resolution before any formal LGSCO investigation became necessary. The actual number of upheld decisions on complaints after detailed investigation has fluctuated over the period concerned, but the number upheld in 2017/18 (9) is no greater than the figure in 2015/16. However, the uphold rate has climbed slightly from 64% to 75%.

5.4 Members may wish to utilise this information to identify trends and to provide

assurance that the Council is proactive in the handling of complaints and in learning from the issues which arise.

6. SUMMARY OF INDIVIDUAL DECISIONS 2017/18

6.1 Within the Authority, Democratic and Member Services Team acts as a central

point of contact for the receipt of complaints and general communications from the LGSCO and both logs and forwards any complaints received to the relevant Directorate. In the case of Families and Wellbeing Directorate LGSCO complaints received are administered by the Customer Complaints Manager, who also has responsibility for the statutory adults and children’s social care complaints systems. Other Directorates have differing arrangements for receipt and administration of complaints forwarded to them, which may involve use of a central point of contact (ie. the Executive Director’s Personal Assistant) or referrals direct from Democratic and Member Services to the relevant head of service.

6.2 Democratic and Member Services Team retain a copy of any interim and final

replies sent to the LGSCO by Directorates. Initial response times to the LGSCO are also recorded, as that performance information is monitored via the Council’s EARS system and reported quarterly to the Executive Board. Copies of any provisional decisions and final decisions by the Ombudsman are also held

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by Democratic and Member Services and are forwarded to the relevant Directorate contact, as appropriate.

6.3 Attached at Appendix 3 is a schedule which provides a summary of the

individual complaints received and (where available) decisions taken by the LGSCO in 2017/18 based upon the records held within the Democratic and Member Services Team.

6.4 The schedule sets out the main grounds of each complaint, the formal decision

and reasons for that decision. Personal information about individual complainants, service users and third parties has not been provided as this will be confidential. The information is provided to enable the Committee to maintain an overview of the types of issues which generate complaints.

6.5 The schedule includes details in respect of a total of 32 referrals received

from the LGSCO. All 32 cases have now been brought to a conclusion. It should be noted that the total number of decisions held by Democratic and Member Services will not normally match the figures provided by the LGSCO in the Annual Review Letter. That is because the Ombudsman’s numbers include enquires from people whom they immediately signpost back to the authority, or cases which the LGSCO deems to be invalid or out of their jurisdiction, which may not be notified to the Council. Details of 16 such cases received by the LGSCO have not been notified to the Council. The numbers of complaints recorded by the Council by service areas are as follows:-

Service Area No. of Complaints

Adult Care Services 5

Benefits and Council Tax 11

Corporate and Other Services 1

Education and Children’s Services 6

Environment Services 5

Highways and Transport 1

Housing 0

Planning and Development 3

Other 0

TOTAL 32

7. FORMAL REPORTS ISSUED

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7.1 There were no formal public interest reports issued against Warrington during 2017/18 by the Ombudsman, requiring publication of a statutory notice by the Borough Council.

8. THE NATIONAL PICTURE

8.1 As in previous years the LGSCO has published an Annual Review of Local

Government Complaints, which provides details of the overall trends of local government complaints on a national scale, which is a useful benchmarking tool. The publication can be viewed using the following link:-

https://www.lgo.org.uk/assets/attach/4382/FINAL.pdf

8.2 The report highlights that the Ombudsman received 17,452 complaints and enquiries about local government in 2017-18, compared with 16,863 in the previous year. Significantly, the proportion of complaints it has upheld has increased to 57% - up from 54% the previous year and from 46% in 2014 when Annual Reviews were first introduced. The Ombudsman has also issued 40% more public interest reports about local authorities since 2016/17.

8.3 The Ombudsman is increasingly challenging authorities by showing how

complaints can improve services more widely, as well as remedying individual injustices. The Ombudsman has made 21% more recommendations for service improvements this year. That compares to recommendations issued to remedy personal injustice which were up by 3% for the same period (from 2,428 to 2,566).

8.4 The Ombudsman notes that nationally complaints upheld about Children and

Education Services have increased from 38% to 65% since 2014. The North West has the highest proportion of Adult Care complaints upheld in 2017/18.

8.5 The annual report includes some examples of where the LGSCO has identified

common themes across a number of authorities and has published thematic Focus Reports. In 2017/18 the following issues have been identified:-

Right to Decide - sometimes the proper checks are not happening or safeguards put in place when councils and care providers make decisions on behalf of people who lack mental capacity to choose how they are cared for.

Waste Services - the outsourcing of services was a common factor in the complaints upheld about waste and recycling services.

Education Health and Care Plans - families of children with special educational needs (SEN) are sometimes facing a disproportionate burden to ensure they get the support they need.

Homelessness - homelessness is increasingly affecting families outside of the capital, and from professions who previously may never expected to

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https://www.lgo.org.uk/assets/attach/4382/FINAL.pdf

face problems finding somewhere to live. Families often find themselves having to stay in unsuitable temporary accommodation for longer.

9. FINANCIAL CONSIDERATIONS 9.1 There are no financial implications in connection with this report.

10. RISK ASSESSMENT 10.1 Failure to monitor feedback from the Ombudsman and to consider any

emerging trends about complaints or systemic issues identified may lead to reputational risk to the Council.

11. EQUALITY AND DIVERSITY / EQUALITY IMPACT ASSESSMENT 11.1 Analysis of future annual information may help to identify any trends

relating equalities issues. 12. CONSULTATION 12.1 None for the purposes of this report. 13. REASONS FOR RECOMMENDATION 13.1 To inform Members about the Council’s performance in relation to

complaints made. 14. RECOMMENDATION 14.1 To note the summary of the complaints received and decisions made by

the Ombudsman in 2017/18 in relation to Warrington and the comparative information for peer authorities and other national trends.

15. BACKGROUND PAPERS

LGSCO Annual Review Letters 2015/16 to 2017/18 Part II (not for publication) - Log of Ombudsman Decisions (spreadsheet)

Contacts for Background Papers:

Name E-mail Telephone

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Julian Joinson [email protected] 01925 442112

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Appendix 1

How complaints and enquiries were dealt with is explained below:

Upheld: These are complaints where we have decided that an authority has been at fault in how it acted and that this fault may or may not have caused an injustice to the complainant, or where an authority has accepted that it needs to remedy the complaint before we make a finding on fault. If we have decided there was fault and it caused an injustice to the complainant, usually we will have recommended the authority take some action to address it.

Not upheld: Where we have investigated a complaint and decided that a council has

not acted with fault, we classify these complaints as not upheld. Advice given: These are cases where we give advice about why LGO would not look

at a complaint because the body complained about was not within the LGO’s scope or we had previously looked at the same complaint from the complainant, or another complaints handling organisation or advice agency was best placed to help them.

Closed after initial enquiries: These complaints are where we have made an early

decision that we could not or should not investigate the complaint, usually because the complaint is outside LGO’s jurisdiction and we either cannot lawfully investigate it or we decide that it would not be appropriate in the circumstances of the case to do so. Our early assessment of a complaint may also show there was little injustice to a complainant that would need an LGO investigation of the matter, or that an investigation could not achieve anything, either because the evidence we see shows at an early stage there was no fault, or the outcome a complainant wants is not one we could achieve, for example overturning a court order.

Incomplete/invalid: These are complaints where the complainant has not provided

us with enough information to be able to decide what should happen with their complaint, or where the complainant tells us at a very early stage that they no longer wish to pursue their complaint.

Referred back for local resolution: We work on the principle that it is always best for

complaints to be resolved by the service provider wherever possible. Furthermore, the Local Government Act 1974 requires LGO to give authorities an opportunity to try and resolve a complaint before we will get involved. In many instances, authorities are successful in doing this.

Extract from LGO website: http://www.lgo.org.uk/publications/annual-report/note-interpretation-statistics/

Item 4

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http://www.lgo.org.uk/publications/annual-report/note-interpretation-statistics/

Appendix 2

LOCAL GOVERNMENT AND SOCIAL CARE OMBUDSMAN – 3 YEAR SUMMARY FROM ANNUAL REVIEW LETTERS 2015/16 – 2017/18

Complaints and Enquiries Received

Year Adult Care Services

Benefits and Tax

Corporate and Other Services

Education and

Children’s Services

Environment Services

Highways and

Transport

Housing Planning and Development

Other Total

2017/18 9 15 3 7 7 1 2 4 0 48

2016/17 12 3 3 11 4 1 2 6 1 43

2015/16 11 6 2 9 6 2 1 2 1 40

Decisions Made

Detailed Investigations

Year Incomplete or Invalid

Advice Given

Referred back for

Local Resolution

Closed After initial Enquiries

Not Upheld Upheld Uphold Rate *1

Total

2017/18 0 2 22 14 3 9 75% 50

2016/17 2 1 16 13 3 2 40% 37

2015/16 1 2 15 11 5 9 64% 43

Complaints Remedied *2

By LGSCO Satisfactorily by Authority

before LGSCO Involvement

2017/18 7 0

2016/17 0 1

Notes *

1 The LGSCO’s uphold rate is calculated in relation to the total number of detailed investigations.

*

2 The number of remedied complaints may not equal the number of upheld complaints

(shown immediately above). This is because, while the LGSCO may uphold a complaint because fault has been found, the LGSCO may not always find grounds to say that fault has caused injustice that ought to be remedied.

Item 4

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Appendix 2

2015/16 8 1

28

Appendix 3

9

Our Ref

Case Ref Service Area Complaint Summary of narrative from Ombudsman Summary of Decision

1 17000637 Highways and Transportation

Complaint about the Council’s issue and handling of a penalty charge notice (PCN).

The Ombudsman will not investigate the complainant’s complaint about the PCN as it would be reasonable for him to apply to the Traffic Enforcement Centre to make a late witness statement. The LGSCO cannot investigate whether the Council’s bailiffs have properly accounted for his vulnerabilities as this has not yet been through the Council’s complaints procedure.

Closed after initial enquiries - out of jurisdiction.

2 17001395 Adult Services Complaint that the complainant’s wife’s care home failed to provide an appropriate diet to his wife. As a result, she gained a lot of weight within a short time.

The Ombudsman found fault and made some recommendations for procedural improvements. The LGSCO was satisfied with the actions the Council would take and therefore completed the investigation. The Council agreed within 6 weeks of the date of the decision, to:- • Apologise to the complainant for the faults

identified above and the distress this has caused him. It would also pay him £200.

• Share the lessons learned with relevant staff members involved with dealing with the issues above.

• Ensure the care home shares the above findings with its staff.

• Ensure the care home puts mechanisms in place that addresses all of the above shortcomings.

A follow up assurance letter to Ombudsman is required in October 2018.

Upheld: maladministration and injustice.

Item 4

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Appendix 3

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3 17002052 Benefits and Tax Complaint on behalf of tenants about the Council’s decision to seek council tax payments relating to the past.

There is no evidence of fault by the Council causing injustice. The question of liability has been determined by a Valuation Tribunal.

Closed after initial enquiries – no further action.

4 17002339 Education and Children's Services

Complaint by an appellant that she was misled into believing that failure to attend a hearing in respect of her appeal against the refusal of a place for her daughter at her preferred school would not affect the outcome.

There was no fault in the way the Council handled the complainant’s appeal against the refusal of a school place for her daughter. The appeal panel’s decision was not flawed by fault so the Ombudsman cannot question its decision. But the Council should make sure it clearly communicates the reasons for the panel’s decision. The Council agreed to:- • to ensure that in future the reasons for the

panel’s decision are clearly communicated to the applicant; and

• review the training needs of clerks and panel members in this regard.

A revised decision letter template was developed in conjunction with the LGSCO.

Upheld: maladministration and injustice. Education

5 17002501 Benefits and Tax Complaint about recovery of Housing Benefit overpayment.

Before investigating a complaint, the LGSCO must normally be satisfied the Council knows about the complaint and has had an opportunity to investigate and to reply. The Council undertook to resolve the matter directly.

Premature complaint (not recorded as a formal decision)

6 17002551 Benefits and Tax Complaint that the Council failed to properly consider the complainant’s application for housing benefit in 2013 or to provide him with a decision letter advising him of his right of appeal.

It is not appropriate to investigate the complainant’s complaint about his housing benefit claim as he had a right of appeal to the Social Security Appeal Tribunal. This would have been the appropriate way to challenge the Council’s decision that he was not eligible for housing benefit, but the complainant but chose not to


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pursue it


Complaint about emotional abuse suffered by the complainant’s children and the Child Protection Conference and the resultant Child Protection Plan.

Before investigating a complaint, the LGSCO must normally be satisfied the Council knows about the complaint and has had an opportunity to investigate and to reply.


8 17002981 Benefits and Tax Complaint that the Council removed the complainant’s council tax single person discount and backdated the removal. He has complained about this to the Council, but has not has a reply. He would like the Council to resolve his complaint and reinstate the discount.

The Ombudsman will not investigate this complaint. The complainant has the right to appeal the Council’s decision to a Tribunal and the Council has now reinstated the discount.


9 17003726 Environmental Services and Public Protection and Regulation

Complaint about the Council’s use of public funds to provide services (refuse collection at an illegal encampment) believed by the complainant to be unnecessary and/or unwarranted.

The issue affects all or most of the people in the Council’s area and is therefore not subject to investigation by the Ombudsman.

Closed after initial enquiries - out of jurisdiction

10 17004399 Benefits and Tax Complaint that the Council has pursued the complainant for a council tax debt from 2011. He says the Council’s systems for payment are not efficient and he had a problem paying online. He says an enforcement agent has visited his home causing distress to his partner and the Council is guilty of bullying behaviour. He says the Council has not replied properly to his complaints.

The Ombudsman will not investigate the complainant’s complaint about how the Council has handled a council tax debt and communicated with him. The Council has not caused the complainant an injustice.

Closed after initial enquiries – no further action

11 17004569 Planning and Development

Complaint about a planning application approved retrospectively.



12 17004724 Benefits and Tax Complaint, that the Council’s council tax service does not have systems which are

The Ombudsman will not investigate this complaint about a council tax error. This is

Closed after initial enquiries – no

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robust enough to prevent errors. because there is insufficient evidence of injustice and because it is unlikely an investigation would lead to a different outcome.

further action


Complaint that the Admissions Appeal Panel (convened by Warrington Council failed to consider the actions of Wigan Metropolitan Borough Council in reaching its decision to dismiss the complainant’s appeal against the decision not to grant a place for their child at a Warrington primary school.

There is no fault in the way Warrington or Wigan Councils dealt with a change to an application for a school place for the complainant’s child.

Not upheld: no maladministration


Complaint about the lack of contact from a social worker following a Family Assistance Order. The complainant feels that this has damaged his relationship with his daughter. The complainant also complains about the following more recent issues:- • The Council has held Child in Need

meetings without him. • He is unhappy with how the Council

dealt with his concerns about the child’s mum.

• He is unhappy the Council asked for proof of his parental responsibility.

• He has concerns about the life story work undertaken.

The Ombudsman finds fault in how the Council dealt with the complaint about contact. The Ombudsman will not investigate other matters because they have not been through the statutory complaints procedure. The Ombudsman recommends the Council follow the statutory complaints procedure for all of the complainant’s complaints. The LGSCO recommends the Council carry out the following actions within one month of the date of the decision:-

• Provide the complainant with a written apology for failing to progress his complaint to stage 2.

• Start dealing with his complaint, emailed on 23 February 2017, as a second stage complaint under the statutory procedure.

• Ask the complainant to confirm details of his further complaints and deal with these under the first stage of the statutory

Upheld: maladministration and injustice

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Appendix 3

13

procedure. • Take steps to ensure staff are aware of

their obligations under the statutory complaints procedure.

The actions have now been carried out to the satisfaction of the Ombudsman.

15 17006336 Benefits and Tax Complaint that it took the Council 14 years to correct the complainant’s council tax band. The Valuation Office has now reduced the band and the complainant wants interest on the refund and compensation.

The Ombudsman will not investigate this complaint about the Council’s decision not to pay interest on a council tax refund. This is because there is insufficient evidence of fault by the Council.

Closed after initial enquiries – no further action

16 17007129 Adult Care Services

Complaint on behalf of the complainant’s late father that the Council failed to properly explain its decision that he had intentionally deprived himself of capital that could have been used to pay for care, having failed to take account of his true intentions.

The Council has agreed to the LGSCO’s recommendation that that it fully reconsiders the matter and issues a fresh decision.

Invalid/Forwarded Decisions


Complaint that demolition of a multi-story car park next to the complainants’ shop affected the complainant’s son's health and created a financial loss within the business. A further complaint that the complainant often had no access to and from the premises which was also her residency.



18 17008179 Benefits and Tax Complaint that the complainant’s council tax bill is incorrect.

The Ombudsman will not investigate the complaint. This is because there is no evidence of fault in the calculation and it is unlikely further investigation would find fault. If the complainant wishes to dispute her liability to pay council tax for


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the period she has a right of appeal to the Valuation Tribunal.


Complaint that, from 2007 onwards, the Council failed to respond properly to the complainant’s complaints about noise disturbance from the properties either side and above his home. He says he has suffered hugely through having to put up with unreasonable levels of noise transferring from his neighbours’ properties to his, due to lack of sufficient sound insulation between them.

The Council is at fault for failing to follow up recommendations it made in its first response to the complaint and in failing to assess the complainant’s home under the Housing Health and Safety Rating System earlier. This led to some uncertainty for the complainant. The Council is in the process of resolving the noise problems through building works which it is funding itself. This is a satisfactory remedy.

Upheld: maladministration and injustice


Complaint that the Council has not responded to a complaint made following the submission of a planning breach notification.

The Council appeared to have misplaced the original complaint made, but was committed to investigating the complaint which it had now received. Before investigating a complaint, the LGSCO must normally be satisfied the Council knows about the complaint and has had an opportunity to investigate and to reply.



Complaint about the Council’s refusal to reduce the size of a willow tree which is on its land next to the complainant’s home. He says he is concerned about public safety if the tree was to be damaged in a storm.

The Ombudsman will not investigate this complaint. There is insufficient evidence of fault on the Council’s part which has caused injustice to the complainant.

Closed after initial enquiries - no further action


Complaint that the Council failed to collect the complainant’s garden waste (blue) bin and then refused to refund him the cost of disposing of the waste himself.

It is unlikely that an investigation by the Ombudsman would find that the Council was at fault for not collecting a bin of garden waste. It cannot therefore be held responsible for the complainant’s decision to dispose of it himself, nor for the costs he claims.

Closed after initial enquiries - no further action

23 17010655 Education and Children's

Complaint from an adult complainant, now age 33, that when he was at age 15 /

Before investigating a complaint, the LGSCO must normally be satisfied the Council knows about the

Premature complaint (not

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Appendix 3

15

Services 16 all his siblings were placed in care, but he was left and thrown out onto the streets. It took around 11 years for the complainant to finally get on his feet and sort out his life. The complainant now wishes to see why this happen and believes that there was wrong-doing. The complainant would like to see the Council responsible pay compensation for the circumstances endured, including major depression, loss of all his family relationships and living on the streets.

complaint and has had an opportunity to investigate and to reply. The Council has now agreed a way forward to engage with the complainant and offered a Safeguarding Adult Review (SAR).

recorded as a formal decision)


Complaint about the care received by the complainant’s late wife in a care home.

The Ombudsman will not investigate this complaint. This is because it is unlikely the LGSCO could add to the previous investigation on this matter.



Complaint that the Council’s care provider cancelled the complainant’s wife’s care package with no notice. This meant she had to stay in hospital while an alternative package was put in place.

The Council’s care provider, a privately run home care organisation, failed to tell both the Council the complainant that it was ending its care of the complainant’s wife. However, this did not cause the complainant or his wife a significant personal injustice as the Council identified an alternative provider which the complainant declined. The Council had reinforced its agreed procedures with its providers to prevent a repeat of the fault.

Upheld: maladministration, no injustice

26 17012489 Benefits and Tax Complaint that the Council has issued the complainant with summonses and liability orders for council tax arrears which have not been authorised by a court. The Council had him removed from the court when he tried to challenge the orders. He also says the Council cancelled his right to payment by

The Ombudsman cannot investigate matters which have been subject to court proceedings. The Ombudsman may not investigate complaints about matters which the complainant was aware of more than twelve months before he made the complaint.


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instalments and demanded the full amount due.


Complaint that the Council has not responded to the complainant’s complaint at stage two of its complaints procedure.

The Ombudsman will not investigate this complaint because there is no evidence of fault.

Closed after initial enquiries - no further action.

28 17013622 Benefits and Tax Complaint that Benefit Services made a mistake and made an overpayment of Housing Benefit.




Complaint about the treatment of the complainant’s wife in a nursing home a few weeks prior to her death and a lack of response from the Council to that complaint.




Complaint that the Council failed to protect the complainant’s children from harm; failed to keep to Court orders; and provided the Court with inaccurate assessments.

The Ombudsman cannot investigate the complaint about how the Council allegedly failed to protect the complainant’s children from harm and the Council’s subsequent failure to address his complaints. The complainant’s concerns for his children’s welfare were raised in court proceedings and so the Ombudsman cannot investigate the complaint.


31 17018037 Corporate and Other Services

Complaint about a quotation printed in a local newspaper about the possible consequences a petition for an elected mayor.



32 17020389 Benefits and Tax Complaint that the Council has unfairly removed business rates tax relief from the complainant.



36

WARRINGTON BOROUGH COUNCIL AUDIT AND CORPORATE GOVERNANCE COMMITTEE – 17 JANUARY 2019 Report of the: Deputy Chief Executive and Director of Corporate Services Report Author: Lynton Green, Deputy Chief Executive and Director of Corporate

Services Contact Details: Email Address:

[email protected] Telephone: 01925 443925

Ward Members:

ALL

TITLE OF REPORT: CHARTERED INSTITUTE OF PUBLIC FINANCE AND ACCOUNTANCY STANDARD OF PROFESSIONAL PRACTICE ON ETHICS 1. PURPOSE 1.1 The purpose of the report attached at Appendix A is to present the Chartered Institute of

Public Finance and Accountancy (CIPFA) Standard of Professional Practice (SOPP) on Ethics.

2. CONFIDENTIAL OR EXEMPT 2.1 This report does not contain information which is either confidential or exempt. 3. INTRODUCTION AND BACKGROUND 3.1 CIPFA as a member of the International Federation of Accountants (IFAC) is committed

to IFAC’s broad objective of developing and enhancing a coordinated worldwide accountancy profession with common standards. In working towards this objective, the International Ethics Standards Board (IESBA) is the global independent standard setting board. Its objective is to serve the public interest by setting high quality ethics standards for professional accountants worldwide and by facilitating the convergence of international and national ethical standards (including auditor independence requirements) through the development of a robust International Code of Ethics for Professional Accountants (The Code).

3.2 The Code was published in April 2018. The stated purpose of the Code is to set out

fundamental principles of ethics for professional accountants, reflecting the profession’s recognition of its public interest responsibility. The principles within the Code establish the standard of behaviour required of a professional accountant.

3.3 CIPFA adopted the Code as its SOPP as of 1st November 2018. The SOPP applies to all

members, affiliate and associate members and students and as a result, all are expected

Item 5

37

to comply with the ethical standards set out in the SOPP. Failure to do so could lead to action under the CIPFA disciplinary scheme.

3.4 In addition to the SOPP, all those engaged in the audit of financial statements and in

other public interest assurance engagements should have regard to the extant The Financial Reporting Council (FRC) Ethical Standard.

4. CIPFA STANDARD OF PROFESSIONAL PRACTICE 4.1 The Code is made up of 4 parts:

Part 1 – General application, the fundamental principles and how they should be interpreted and understood. Applies to all accountants and students irrespective of their work role. Part 2 – Sections relevant to professional accountants in business. Part 3 – Sections relevant to professional accountants in public practice. Applies to those who work as auditors in public practice Part 4 – Sections relevant to independence.

4.2 Fundamental principles in the SOPP:

Integrity

Objectivity

Professional Competence and Due Care

Confidentiality

Professional Behaviour

Intrinsically linked to the Nolan seven ‘principles of public life’ with which accountants working in the public sector are expected to comply.

4.3 The SOPP identifies a series of threats that could persuade individuals to override

objectivity and breach the principles included within in and which could include:

Self-interest

Intimidation

Self-review

Familiarity

Advocacy

38

4.4 The SOPP identifies two main categories of safeguards than can be used to mitigate unethical behaviour arising from these threats:

Institutional safeguards – standards, policies, financial regulations, hospitality registers, declarations of interest, segregation of duties etc.

Personal safeguards – character, networks, contacts, removing a conflict of interest, Ethics Sounding Board.

5. FINANCIAL CONSIDERATIONS 5.1 There are no direct financial implications arising from this report.

6. RISK ASSESSMENT 6.1 The Council is under a statutory obligation to ensure that it has appropriate corporate

governance arrangements in place in order to maintain a sound system of internal control (as set out in Part 2 of The Accounts and Audit Regulations 2015).

7. EQUALITY AND DIVERSITY / EQUALITY IMPACT ASSESSMENT

7.1 There are no specific equalities issues in relation to the content of this report.

8. CONSULTATION 8.1 The development of the Council’s Ethical Framework which was approved by Audit &

Corporate Governance Committee in February 2018 has previously been discussed by the Scrutiny Committee and Executive Board.

9. REASONS FOR RECOMMENDATION 9.1 To ensure that members have an appropriate level of assurance of CIPFA standards. 9.2 To ensure that the members of the Audit and Corporate Governance Committee are able to fulfil their obligations under the CIPFA/SOLACE framework. 10. RECOMMENDATION

10.1 That the Audit and Corporate Governance Committee considers and notes this report as part of its monitoring role.

39

11. BACKGROUND PAPERS CIPFA Standard of Professional Practice (SOPP) on Ethics. WBC Ethical Framework Officer / Member Codes of Conduct Code of Corporate Governance Contacts for Background Papers:


Jean Gleave [email protected] 01925 442354

40

CIPFA Standard of Professional Practice on Ethics

Foreword

The Chartered Institute of Public Finance and Accountancy (CIPFA) as a member of the

International Federation of Accountants (IFAC) is committed to IFAC’s broad objective of

developing and enhancing a coordinated worldwide accountancy profession with common

standards.

In working towards this objective, the International Ethics Standards Board (IESBA) is the

global independent standard setting board. Its objective is to serve the public interest by

setting high quality ethics standards for professional accountants worldwide and by

facilitating the convergence of international and national ethical standards (including

auditor independence requirements) through the development of a robust International

Code of Ethics for Professional Accountants (The Code).

The Code was published in April 2018. The stated purpose of the Code is to set out

fundamental principles of ethics for professional accountants, reflecting the profession’s

recognition of its public interest responsibility. The principles within the Code establish

the standard of behaviour required of a professional accountant.

CIPFA has adopted this Code as its Standard of Professional Practice (SOPP) as of 1st

November 2018. The SOPP applies to all members, affiliate and associate members and

students and as a result, all are expected to comply with the ethical standards set out in

this SOPP. Failure to do so could lead to action under the CIPFA disciplinary scheme.

In addition to this SOPP, all those engaged in the audit of financial statements and in other

public interest assurance engagements should have regard to the extant The Financial

Reporting Council (FRC) Ethical Standard.

Item 5

41

11

HANDBOOK OF THE INTERNATIONAL CODE OF ETHICS FOR PROFESSIONAL ACOUNTANTS

(including INTERNATIONAL INDEPENDENCE STANDARDS)

TABLE OF CONTENTS

Page

PREFACE ....................................................................................................... 14

PART 1 – COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK ............. 15

100 Complying with the Code ...................................................................... 16

110 The Fundamental Principles ................................................................... 18

111 – Integrity ........................................................................................ 19

112 – Objectivity .................................................................................... 19

113 – Professional Competence and Due Care ...................................... 20

114 – Confidentiality .............................................................................. 20

115 – Professional Behavior ................................................................... 22

120 The Conceptual Framework .................................................................. 24

PART 2 – PROFESSIONAL ACCOUNTANTS IN BUSINESS ................ 32

200 Applying the Conceptual Framework – Professional Accountants in Business ........................................................................ 33

210 Conflicts of Interest ................................................................................ 38

220 Preparation and Presentation of Information ......................................... 41

230 Acting with Sufficient Expertise ............................................................ 46

240 Financial Interests, Compensation and Incentives Linked to Financial Reporting and Decision Making ............................................................ 48

250 Inducements, Including Gifts and Hospitality ....................................... 50

260 Responding to Non-compliance with Laws and Regulations ................ 56

270 Pressure to Breach the Fundamental Principles ..................................... 66

PART 3 – PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE .. 70

300 Applying the Conceptual Framework – Professional Accountants in Public Practice ............................................................... 71

310 Conflicts of Interest ................................................................................ 7842

12TABLE OF CONTENTS

320 Professional Appointments .................................................................... 85

321 Second Opinions .................................................................................... 89

330 Fees and Other Types of Remuneration ................................................. 90

340 Inducements, Including Gifts and Hospitality ....................................... 93

350 Custody of Client Assets ........................................................................ 99

360 Responding to Non-compliance with Laws and Regulations ................ 100

INTERNATIONAL INDEPENDENCE STANDARDS (PARTS 4A AND 4B) ..................................................................................... 116

PART 4A – INDEPENDENCE FOR AUDIT AND REVIEW ENGAGEMENTS ...................................................................... 116

400 Applying the Conceptual Framework to Independence for Audit and Review Engagements ...................................................................... 118

410 Fees ........................................................................................................ 132

411 Compensation and Evaluation Policies .................................................. 136

420 Gifts and Hospitality .............................................................................. 137

430 Actual or Threatened Litigation ............................................................. 138

510 Financial Interests .................................................................................. 139

511 Loans and Guarantees ............................................................................ 144

520 Business Relationships........................................................................... 146

521 Family and Personal Relationships ........................................................ 148

522 Recent Service with an Audit Client ...................................................... 151

523 Serving as a Director or Officer of an Audit Client ............................... 153

524 Employment With an Audit Client ......................................................... 154

525 Temporary Personnel Assignments ........................................................ 158

540 Long Association of Personnel (Including Partner Rotation) with an Audit Client ............................................................................................ 159

600 Provision of Non-Assurance Services to an Audit Client ....................... 165

601 – Accounting and Bookkeeping Services ........................................ 170

602 – Administrative Services ................................................................ 173

603 – Valuation Services ........................................................................ 173

43

13 TABLE OF CONTENTS

604 – Tax Services.................................................................................. 175

605 – Internal Audit Services ................................................................. 181

606 – Information Technology Systems Services .................................. 184

607 – Litigation Support Services .......................................................... 186

608 – Legal Services .............................................................................. 187

609 – Recruiting Services....................................................................... 189

610 – Corporate Finance Services .......................................................... 191

800 Reports on Special Purpose Financial Statements that Include a Restriction on Use and Distribution (Audit and Review Engagements) ... 193

PART 4B – INDEPENDENCE FOR ASSURANCE ENGAGEMENTS OTHER THAN AUDIT AND REVIEW ENGAGEMENTS .... 197

900 Applying the Conceptual Framework to Independence for Assurance Engagements Other than Audit and Review Engagements .................... 198

905 Fees ........................................................................................................ 206

906 Gifts and Hospitality .............................................................................. 209

907 Actual or Threatened Litigation ............................................................. 210

910 Financial Interests .................................................................................. 211

911 Loans and Guarantees ............................................................................ 215

920 Business Relationships........................................................................... 217

921 Family and Personal Relationships ........................................................ 219

922 Recent Service with an Assurance Client .............................................. 222

923 Serving as a Director or Officer of an Assurance Client ........................ 223

924 Employment with an Assurance Client .................................................. 224

940 Long Association of Personnel with an Assurance Client ..................... 226

950 Provision of Non-assurance Services to Assurance Clients Other than Audit and Review Engagement Clients ................................................. 228

990 Reports that Include a Restriction on Use and Distribution (Assurance Engagements Other than Audit and Review Engagements) .................. 232

GLOSSARY, INCLUDING LISTS OF ABBREVIATIONS ...................... 235

EFFECTIVE DATE ....................................................................................... 248

44

14PREFACE

PREFACEThe IESBA develops and issues, under its own standard setting authority, the International Code of Ethics for Professional Accountants (including International Independence Standards) (“the Code”). The Code is for use by professional accountants around the world. The IESBA establishes the Code for international application following due process.

The International Federation of Accountants (IFAC) establishes separate requirements for its member bodies with respect to the Code.

45

15

PART 1 – COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK

Page

Section 100 Complying with the Code ......................................................... 16

Section 110 The Fundamental Principles ...................................................... 18

Subsection 111 – Integrity ...................................................................... 19

Subsection 112 – Objectivity.................................................................. 19

Subsection 113 – Professional Competence and Due Care .................... 20

Subsection 114 – Confidentiality............................................................ 20

Subsection 115 – Professional Behavior ................................................ 22

Section 120 The Conceptual Framework ...................................................... 24

46

16

THE CODE

SECTION 100

PART 1 – COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK

SECTION 100

COMPLYING WITH THE CODE

General100.1 A1 A distinguishing mark of the accountancy profession is its acceptance

of the responsibility to act in the public interest. A professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employing organization. Therefore, the Code contains requirements and application material to enable professional accountants to meet their responsibility to act in the public interest.

100.2 A1 The requirements in the Code, designated with the letter “R,” impose obligations.

100.2 A2 Application material, designated with the letter “A,” provides context, explanations, suggestions for actions or matters to consider, illustrations and other guidance relevant to a proper understanding of the Code. In particular, the application material is intended to help a professional accountant to understand how to apply the conceptual framework to a particular set of circumstances and to understand and comply with a specific requirement. While such application material does not of itself impose a requirement, consideration of the material is necessary to the proper application of the requirements of the Code, including application of the conceptual framework.

R100.3 A professional accountant shall comply with the Code. There might be circumstances where laws or regulations preclude an accountant from complying with certain parts of the Code. In such circumstances, those laws and regulations prevail, and the accountant shall comply with all other parts of the Code.

100.3 A1 The principle of professional behavior requires a professional accountant to comply with relevant laws and regulations. Some jurisdictions might have provisions that differ from or go beyond those set out in the Code. Accountants in those jurisdictions need to be aware of those differences and comply with the more stringent provisions unless prohibited by law or regulation.

100.3 A2 A professional accountant might encounter unusual circumstances in which the accountant believes that the result of applying a specific requirement of the Code would be disproportionate or might not be in the public interest. In those circumstances, the accountant is encouraged to consult with a professional or regulatory body.

47

17

THE CODE

SECTION 100

PART

1

Breaches of the Code

R100.4 Paragraphs R400.80 to R400.89 and R900.50 to R900.55 address a breach of International Independence Standards. A professional accountant who identifies a breach of any other provision of the Code shall evaluate the significance of the breach and its impact on the accountant’s ability to comply with the fundamental principles. The accountant shall also:

(a) Take whatever actions might be available, as soon as possible, to address the consequences of the breach satisfactorily; and

(b) Determine whether to report the breach to the relevant parties.

100.4 A1 Relevant parties to whom such a breach might be reported include those who might have been affected by it, a professional or regulatory body or an oversight authority.

48

18

THE CODE

SECTION 110

SECTION 110

THE FUNDAMENTAL PRINCIPLES

General110.1 A1 There are five fundamental principles of ethics for professional

accountants:

(a) Integrity – to be straightforward and honest in all professional and business relationships.

(b) Objectivity – not to compromise professional or business judgments because of bias, conflict of interest or undue influence of others.

(c) Professional Competence and Due Care – to:

(i) Attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organization receives competent professional service, based on current technical and professional standards and relevant legislation; and

(ii) Act diligently and in accordance with applicable technical and professional standards.

(d) Confidentiality – to respect the confidentiality of information acquired as a result of professional and business relationships.

(e) Professional Behavior – to comply with relevant laws and regulations and avoid any conduct that the professional accountant knows or should know might discredit the profession.

R110.2 A professional accountant shall comply with each of the fundamental principles.

110.2 A1 The fundamental principles of ethics establish the standard of behavior expected of a professional accountant. The conceptual framework establishes the approach which an accountant is required to apply to assist in complying with those fundamental principles. Subsections 111 to 115 set out requirements and application material related to each of the fundamental principles.

110.2 A2 A professional accountant might face a situation in which complying with one fundamental principle conflicts with complying with one or more other fundamental principles. In such a situation, the accountant might consider consulting, on an anonymous basis if necessary, with:

● Others within the firm or employing organization.

● Those charged with governance.49

19

THE CODE

SECTION 110

PART

1

● A professional body.

● A regulatory body.

● Legal counsel.

However, such consultation does not relieve the accountant from the responsibility to exercise professional judgment to resolve the conflict or, if necessary, and unless prohibited by law or regulation, disassociate from the matter creating the conflict.

110.2 A3 The professional accountant is encouraged to document the substance of the issue, the details of any discussions, the decisions made and the rationale for those decisions.

SUBSECTION 111 – INTEGRITY R111.1 A professional accountant shall comply with the principle of integrity,

which requires an accountant to be straightforward and honest in all professional and business relationships.

111.1 A1 Integrity implies fair dealing and truthfulness.

R111.2 A professional accountant shall not knowingly be associated with reports, returns, communications or other information where the accountant believes that the information:

(a) Contains a materially false or misleading statement;

(b) Contains statements or information provided recklessly; or

(c) Omits or obscures required information where such omission or obscurity would be misleading.

111.2 A1 If a professional accountant provides a modified report in respect of such a report, return, communication or other information, the accountant is not in breach of paragraph R111.2.

R111.3 When a professional accountant becomes aware of having been associated with information described in paragraph R111.2, the accountant shall take steps to be disassociated from that information.

SUBSECTION 112 – OBJECTIVITYR112.1 A professional accountant shall comply with the principle of objectivity,

which requires an accountant not to compromise professional or business judgment because of bias, conflict of interest or undue influence of others.

R112.2 A professional accountant shall not undertake a professional activity if a circumstance or relationship unduly influences the accountant’s professional judgment regarding that activity.

50

20

THE CODE

SECTION 110

SUBSECTION 113 – PROFESSIONAL COMPETENCE AND DUE CARE R113.1 A professional accountant shall comply with the principle of professional

competence and due care, which requires an accountant to:

(a) Attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organization receives competent professional service, based on current technical and professional standards and relevant legislation; and

(b) Act diligently and in accordance with applicable technical and professional standards.

113.1 A1 Serving clients and employing organizations with professional competence requires the exercise of sound judgment in applying professional knowledge and skill when undertaking professional activities.

113.1 A2 Maintaining professional competence requires a continuing awareness and an understanding of relevant technical, professional and business developments. Continuing professional development enables a professional accountant to develop and maintain the capabilities to perform competently within the professional environment.

113.1 A3 Diligence encompasses the responsibility to act in accordance with the requirements of an assignment, carefully, thoroughly and on a timely basis.

R113.2 In complying with the principle of professional competence and due care, a professional accountant shall take reasonable steps to ensure that those working in a professional capacity under the accountant’s authority have appropriate training and supervision.

R113.3 Where appropriate, a professional accountant shall make clients, the employing organization, or other users of the accountant’s professional services or activities, aware of the limitations inherent in the services or activities.

SUBSECTION 114 – CONFIDENTIALITYR114.1 A professional accountant shall comply with the principle of

confidentiality, which requires an accountant to respect the confidentiality of information acquired as a result of professional and business relationships. An accountant shall:

(a) Be alert to the possibility of inadvertent disclosure, including in a social environment, and particularly to a close business associate or an immediate or a close family member;51

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(b) Maintain confidentiality of information within the firm or employing organization;

(c) Maintain confidentiality of information disclosed by a prospective client or employing organization;

(d) Not disclose confidential information acquired as a result of professional and business relationships outside the firm or employing organization without proper and specific authority, unless there is a legal or professional duty or right to disclose;

(e) Not use confidential information acquired as a result of professional and business relationships for the personal advantage of the accountant or for the advantage of a third party;

(f) Not use or disclose any confidential information, either acquired or received as a result of a professional or business relationship, after that relationship has ended; and

(g) Take reasonable steps to ensure that personnel under the accountant’s control, and individuals from whom advice and assistance are obtained, respect the accountant’s duty of confidentiality.

114.1 A1 Confidentiality serves the public interest because it facilitates the free flow of information from the professional accountant’s client or employing organization to the accountant in the knowledge that the information will not be disclosed to a third party. Nevertheless, the following are circumstances where professional accountants are or might be required to disclose confidential information or when such disclosure might be appropriate:

(a) Disclosure is required by law, for example:

(i) Production of documents or other provision of evidence in the course of legal proceedings; or

(ii) Disclosure to the appropriate public authorities of infringements of the law that come to light;

(b) Disclosure is permitted by law and is authorized by the client or the employing organization; and

(c) There is a professional duty or right to disclose, when not prohibited by law:

(i) To comply with the quality review of a professional body;

(ii) To respond to an inquiry or investigation by a professional or regulatory body;

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(iii) To protect the professional interests of a professional accountant in legal proceedings; or

(iv) To comply with technical and professional standards, including ethics requirements.

114.1 A2 In deciding whether to disclose confidential information, factors to consider, depending on the circumstances, include:

● Whether the interests of any parties, including third parties whose interests might be affected, could be harmed if the client or employing organization consents to the disclosure of information by the professional accountant.

● Whether all the relevant information is known and substantiated, to the extent practicable. Factors affecting the decision to disclose include:

○ Unsubstantiated facts.

○ Incomplete information.

○ Unsubstantiated conclusions.

● The proposed type of communication, and to whom it is addressed.

● Whether the parties to whom the communication is addressed are appropriate recipients.

R114.2 A professional accountant shall continue to comply with the principle of confidentiality even after the end of the relationship between the accountant and a client or employing organization. When changing employment or acquiring a new client, the accountant is entitled to use prior experience but shall not use or disclose any confidential information acquired or received as a result of a professional or business relationship.

SUBSECTION 115 – PROFESSIONAL BEHAVIORR115.1 A professional accountant shall comply with the principle of professional

behavior, which requires an accountant to comply with relevant laws and regulations and avoid any conduct that the accountant knows or should know might discredit the profession. A professional accountant shall not knowingly engage in any business, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the profession, and as a result would be incompatible with the fundamental principles.

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115.1 A1 Conduct that might discredit the profession includes conduct that a reasonable and informed third party would be likely to conclude adversely affects the good reputation of the profession.

R115.2 When undertaking marketing or promotional activities, a professional accountant shall not bring the profession into disrepute. A professional accountant shall be honest and truthful and shall not make:

(a) Exaggerated claims for the services offered by, or the qualifications or experience of, the accountant; or

(b) Disparaging references or unsubstantiated comparisons to the work of others.

115.2 A1 If a professional accountant is in doubt about whether a form of advertising or marketing is appropriate, the accountant is encouraged to consult with the relevant professional body.

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SECTION 120

THE CONCEPTUAL FRAMEWORK

Introduction 120.1 The circumstances in which professional accountants operate might

create threats to compliance with the fundamental principles. Section 120 sets out requirements and application material, including a conceptual framework, to assist accountants in complying with the fundamental principles and meeting their responsibility to act in the public interest. Such requirements and application material accommodate the wide range of facts and circumstances, including the various professional activities, interests and relationships, that create threats to compliance with the fundamental principles. In addition, they deter accountants from concluding that a situation is permitted solely because that situation is not specifically prohibited by the Code.

120.2 The conceptual framework specifies an approach for a professional accountant to:

(a) Identify threats to compliance with the fundamental principles;

(b) Evaluate the threats identified; and

(c) Address the threats by eliminating or reducing them to an acceptable level.

Requirements and Application Material General

R120.3 The professional accountant shall apply the conceptual framework to identify, evaluate and address threats to compliance with the fundamental principles set out in Section 110.

120.3 A1 Additional requirements and application material that are relevant to the application of the conceptual framework are set out in:

(a) Part 2 – Professional Accountants in Business;

(b) Part 3 – Professional Accountants in Public Practice; and

(c) International Independence Standards, as follows:

(i) Part 4A – Independence for Audit and Review Engagements; and

(ii) Part 4B – Independence for Assurance Engagements Other than Audit and Review Engagements.

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R120.4 When dealing with an ethics issue, the professional accountant shall consider the context in which the issue has arisen or might arise. Where an individual who is a professional accountant in public practice is performing professional activities pursuant to the accountant’s relationship with the firm, whether as a contractor, employee or owner, the individual shall comply with the provisions in Part 2 that apply to these circumstances.

R120.5 When applying the conceptual framework, the professional accountant shall:

(a) Exercise professional judgment;

(b) Remain alert for new information and to changes in facts and circumstances; and

(c) Use the reasonable and informed third party test described in paragraph 120.5 A4.

Exercise of Professional Judgment

120.5 A1 Professional judgment involves the application of relevant training, professional knowledge, skill and experience commensurate with the facts and circumstances, including the nature and scope of the particular professional activities, and the interests and relationships involved. In relation to undertaking professional activities, the exercise of professional judgment is required when the professional accountant applies the conceptual framework in order to make informed decisions about the courses of actions available, and to determine whether such decisions are appropriate in the circumstances.

120.5 A2 An understanding of known facts and circumstances is a prerequisite to the proper application of the conceptual framework. Determining the actions necessary to obtain this understanding and coming to a conclusion about whether the fundamental principles have been complied with also require the exercise of professional judgment.

120.5 A3 In exercising professional judgment to obtain this understanding, the professional accountant might consider, among other matters, whether:

● There is reason to be concerned that potentially relevant information might be missing from the facts and circumstances known to the accountant.

● There is an inconsistency between the known facts and circumstances and the accountant’s expectations.

● The accountant’s expertise and experience are sufficient to reach a conclusion.

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● There is a need to consult with others with relevant expertise or experience.

● The information provides a reasonable basis on which to reach a conclusion.

● The accountant’s own preconception or bias might be affecting the accountant’s exercise of professional judgment.

● There might be other reasonable conclusions that could be reached from the available information.

Reasonable and Informed Third Party

120.5 A4 The reasonable and informed third party test is a consideration by the professional accountant about whether the same conclusions would likely be reached by another party. Such consideration is made from the perspective of a reasonable and informed third party, who weighs all the relevant facts and circumstances that the accountant knows, or could reasonably be expected to know, at the time the conclusions are made. The reasonable and informed third party does not need to be an accountant, but would possess the relevant knowledge and experience to understand and evaluate the appropriateness of the accountant’s conclusions in an impartial manner.

Identifying Threats

R120.6 The professional accountant shall identify threats to compliance with the fundamental principles.

120.6 A1 An understanding of the facts and circumstances, including any professional activities, interests and relationships that might compromise compliance with the fundamental principles, is a prerequisite to the professional accountant’s identification of threats to such compliance. The existence of certain conditions, policies and procedures established by the profession, legislation, regulation, the firm, or the employing organization that can enhance the accountant acting ethically might also help identify threats to compliance with the fundamental principles. Paragraph 120.8 A2 includes general examples of such conditions, policies and procedures which are also factors that are relevant in evaluating the level of threats.

120.6 A2 Threats to compliance with the fundamental principles might be created by a broad range of facts and circumstances. It is not possible to define every situation that creates threats. In addition, the nature of engagements and work assignments might differ and, consequently, different types of threats might be created.

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120.6 A3 Threats to compliance with the fundamental principles fall into one or more of the following categories:

(a) Self-interest threat – the threat that a financial or other interest will inappropriately influence a professional accountant’s judgment or behavior;

(b) Self-review threat – the threat that a professional accountant will not appropriately evaluate the results of a previous judgment made; or an activity performed by the accountant, or by another individual within the accountant’s firm or employing organization, on which the accountant will rely when forming a judgment as part of performing a current activity;

(c) Advocacy threat – the threat that a professional accountant will promote a client’s or employing organization’s position to the point that the accountant’s objectivity is compromised;

(d) Familiarity threat – the threat that due to a long or close relationship with a client, or employing organization, a professional accountant will be too sympathetic to their interests or too accepting of their work; and

(e) Intimidation threat – the threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the accountant.

120.6 A4 A circumstance might create more than one threat, and a threat might affect compliance with more than one fundamental principle.

Evaluating Threats

R120.7 When the professional accountant identifies a threat to compliance with the fundamental principles, the accountant shall evaluate whether such a threat is at an acceptable level.

Acceptable Level

120.7 A1 An acceptable level is a level at which a professional accountant using the reasonable and informed third party test would likely conclude that the accountant complies with the fundamental principles.

Factors Relevant in Evaluating the Level of Threats

120.8 A1 The consideration of qualitative as well as quantitative factors is relevant in the professional accountant’s evaluation of threats, as is the combined effect of multiple threats, if applicable.

120.8 A2 The existence of conditions, policies and procedures described in paragraph 120.6 A1 might also be factors that are relevant in evaluating

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the level of threats to compliance with fundamental principles. Examples of such conditions, policies and procedures include:

● Corporate governance requirements.

● Educational, training and experience requirements for the profession.

● Effective complaint systems which enable the professional accountant and the general public to draw attention to unethical behavior.

● An explicitly stated duty to report breaches of ethics requirements.

● Professional or regulatory monitoring and disciplinary procedures.

Consideration of New Information or Changes in Facts and Circumstances

R120.9 If the professional accountant becomes aware of new information or changes in facts and circumstances that might impact whether a threat has been eliminated or reduced to an acceptable level, the accountant shall re-evaluate and address that threat accordingly.

120.9 A1 Remaining alert throughout the professional activity assists the professional accountant in determining whether new information has emerged or changes in facts and circumstances have occurred that:

(a) Impact the level of a threat; or

(b) Affect the accountant’s conclusions about whether safeguards applied continue to be appropriate to address identified threats.

120.9 A2 If new information results in the identification of a new threat, the professional accountant is required to evaluate and, as appropriate, address this threat. (Ref: Paras. R120.7 and R120.10).

Addressing Threats

R120.10 If the professional accountant determines that the identified threats to compliance with the fundamental principles are not at an acceptable level, the accountant shall address the threats by eliminating them or reducing them to an acceptable level. The accountant shall do so by:

(a) Eliminating the circumstances, including interests or relationships, that are creating the threats;

(b) Applying safeguards, where available and capable of being applied, to reduce the threats to an acceptable level; or

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Actions to Eliminate Threats

120.10 A1 Depending on the facts and circumstances, a threat might be addressed by eliminating the circumstance creating the threat. However, there are some situations in which threats can only be addressed by declining or ending the specific professional activity. This is because the circumstances that created the threats cannot be eliminated and safeguards are not capable of being applied to reduce the threat to an acceptable level.

Safeguards

120.10 A2 Safeguards are actions, individually or in combination, that the professional accountant takes that effectively reduce threats to compliance with the fundamental principles to an acceptable level.

Consideration of Significant Judgments Made and Overall Conclusions Reached

R120.11 The professional accountant shall form an overall conclusion about whether the actions that the accountant takes, or intends to take, to address the threats created will eliminate those threats or reduce them to an acceptable level. In forming the overall conclusion, the accountant shall:

(a) Review any significant judgments made or conclusions reached; and

(b) Use the reasonable and informed third party test.

Considerations for Audits, Reviews and Other Assurance Engagements

Independence

120.12 A1 Professional accountants in public practice are required by International Independence Standards to be independent when performing audits, reviews, or other assurance engagements. Independence is linked to the fundamental principles of objectivity and integrity. It comprises:

(a) Independence of mind – the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity, and exercise objectivity and professional skepticism.

(b) Independence in appearance – the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude that a firm’s or an audit or assurance team member’s integrity, objectivity or professional skepticism has been compromised.

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120.12 A2 International Independence Standards set out requirements and application material on how to apply the conceptual framework to maintain independence when performing audits, reviews or other assurance engagements. Professional accountants and firms are required to comply with these standards in order to be independent when conducting such engagements. The conceptual framework to identify, evaluate and address threats to compliance with the fundamental principles applies in the same way to compliance with independence requirements. The categories of threats to compliance with the fundamental principles described in paragraph 120.6 A3 are also the categories of threats to compliance with independence requirements.

Professional Skepticism

120.13 A1 Under auditing, review and other assurance standards, including those issued by the IAASB, professional accountants in public practice are required to exercise professional skepticism when planning and performing audits, reviews and other assurance engagements. Professional skepticism and the fundamental principles that are described in Section 110 are inter-related concepts.

120.13 A2 In an audit of financial statements, compliance with the fundamental principles, individually and collectively, supports the exercise of professional skepticism, as shown in the following examples:

● Integrity requires the professional accountant to be straightforward and honest. For example, the accountant complies with the principle of integrity by:

(a) Being straightforward and honest when raising concerns about a position taken by a client; and

(b) Pursuing inquiries about inconsistent information and seeking further audit evidence to address concerns about statements that might be materially false or misleading in order to make informed decisions about the appropriate course of action in the circumstances.

In doing so, the accountant demonstrates the critical assessment of audit evidence that contributes to the exercise of professional skepticism.

● Objectivity requires the professional accountant not to compromise professional or business judgment because of bias, conflict of interest or the undue influence of others. For example, the accountant complies with the principle of objectivity by:

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(a) Recognizing circumstances or relationships such as familiarity with the client, that might compromise the accountant’s professional or business judgment; and

(b) Considering the impact of such circumstances and relationships on the accountant’s judgment when evaluating the sufficiency and appropriateness of audit evidence related to a matter material to the client’s financial statements.

In doing so, the accountant behaves in a manner that contributes to the exercise of professional skepticism.

● Professional competence and due care requires the professional accountant to have professional knowledge and skill at the level required to ensure the provision of competent professional service, and to act diligently in accordance with applicable standards, laws and regulations. For example, the accountant complies with the principle of professional competence and due care by:

(a) Applying knowledge that is relevant to a particular client’s industry and business activities in order to properly identify risks of material misstatement;

(b) Designing and performing appropriate audit procedures; and

(c) Applying relevant knowledge when critically assessing whether audit evidence is sufficient and appropriate in the circumstances.

In doing so, the accountant behaves in a manner that contributes to the exercise of professional skepticism.

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PART 2 – PROFESSIONAL ACCOUNTANTS IN BUSINESSPage

Section 200 Applying the Conceptual Framework – Professional Accountants in Business ........................................................... 33

Section 210 Conflicts of Interest ................................................................... 38

Section 220 Preparation and Presentation of Information ............................ 41

Section 230 Acting with Sufficient Expertise ............................................... 46

Section 240 Financial Interests, Compensation and Incentives Linked to Financial Reporting and Decision Making ............................... 48

Section 250 Inducements, Including Gifts and Hospitality .......................... 50

Section 260 Responding to Non-compliance with Laws and Regulations ... 56

Section 270 Pressure to Breach the Fundamental Principles ........................ 66

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PART 2 - PROFESSIONAL ACCOUNTANTS IN BUSINESS

SECTION 200

APPLYING THE CONCEPTUAL FRAMEWORK – PROFESSIONAL ACCOUNTANTS IN BUSINESS

Introduction200.1 This Part of the Code sets out requirements and application material

for professional accountants in business when applying the conceptual framework set out in Section 120. It does not describe all of the facts and circumstances, including professional activities, interests and relationships, that could be encountered by professional accountants in business, which create or might create threats to compliance with the fundamental principles. Therefore, the conceptual framework requires professional accountants in business to be alert for such facts and circumstances.

200.2 Investors, creditors, employing organizations and other sectors of the business community, as well as governments and the general public, might rely on the work of professional accountants in business. Professional accountants in business might be solely or jointly responsible for the preparation and reporting of financial and other information, on which both their employing organizations and third parties might rely. They might also be responsible for providing effective financial management and competent advice on a variety of business-related matters.

200.3 A professional accountant in business might be an employee, contractor, partner, director (executive or non-executive), owner-manager, or volunteer of an employing organization. The legal form of the relationship of the accountant with the employing organization has no bearing on the ethical responsibilities placed on the accountant.

200.4 In this Part, the term “professional accountant” refers to:

(a) A professional accountant in business; and

(b) An individual who is a professional accountant in public practice when performing professional activities pursuant to the accountant’s relationship with the accountant’s firm, whether as a contractor, employee or owner. More information on when Part 2 is applicable to professional accountants in public practice is set out in paragraphs R120.4, R300.5 and 300.5 A1.

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Requirements and Application MaterialGeneral

R200.5 A professional accountant shall comply with the fundamental principles set out in Section 110 and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to compliance with the fundamental principles.

200.5 A1 A professional accountant has a responsibility to further the legitimate objectives of the accountant’s employing organization. The Code does not seek to hinder accountants from fulfilling that responsibility, but addresses circumstances in which compliance with the fundamental principles might be compromised.

200.5 A2 Professional accountants may promote the position of the employing organization when furthering the legitimate goals and objectives of their employing organization, provided that any statements made are neither false nor misleading. Such actions usually would not create an advocacy threat.

200.5 A3 The more senior the position of a professional accountant, the greater will be the ability and opportunity to access information, and to influence policies, decisions made and actions taken by others involved with the employing organization. To the extent that they are able to do so, taking into account their position and seniority in the organization, accountants are expected to encourage and promote an ethics-based culture in the organization. Examples of actions that might be taken include the introduction, implementation and oversight of:

● Ethics education and training programs.

● Ethics and whistle-blowing policies.

● Policies and procedures designed to prevent non-compliance with laws and regulations.

Identifying Threats

200.6 A1 Threats to compliance with the fundamental principles might be created by a broad range of facts and circumstances. The categories of threats are described in paragraph 120.6 A3. The following are examples of facts and circumstances within each of those categories that might create threats for a professional accountant when undertaking a professional activity:

(a) Self-interest Threats

● A professional accountant holding a financial interest in, or receiving a loan or guarantee from, the employing organization. 65

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● A professional accountant participating in incentive compensation arrangements offered by the employing organization.

● A professional accountant having access to corporate assets for personal use.

● A professional accountant being offered a gift or special treatment from a supplier of the employing organization.

(b) Self-review Threats

● A professional accountant determining the appropriate accounting treatment for a business combination after performing the feasibility study supporting the purchase decision.

(c) Advocacy Threats

● A professional accountant having the opportunity to manipulate information in a prospectus in order to obtain favorable financing.

(d) Familiarity Threats

● A professional accountant being responsible for the financial reporting of the employing organization when an immediate or close family member employed by the organization makes decisions that affect the financial reporting of the organization.

● A professional accountant having a long association with individuals influencing business decisions.

(e) Intimidation Threats

● A professional accountant or immediate or close family member facing the threat of dismissal or replacement over a disagreement about:

○ The application of an accounting principle.

○ The way in which financial information is to be reported.

● An individual attempting to influence the decision-making process of the professional accountant, for example with regard to the awarding of contracts or the application of an accounting principle.

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Evaluating Threats

200.7 A1 The conditions, policies and procedures described in paragraphs 120.6 A1 and 120.8 A2 might impact the evaluation of whether a threat to compliance with the fundamental principles is at an acceptable level.

200.7 A2 The professional accountant’s evaluation of the level of a threat is also impacted by the nature and scope of the professional activity.

200.7 A3 The professional accountant’s evaluation of the level of a threat might be impacted by the work environment within the employing organization and its operating environment. For example:

● Leadership that stresses the importance of ethical behavior and the expectation that employees will act in an ethical manner.

● Policies and procedures to empower and encourage employees to communicate ethics issues that concern them to senior levels of management without fear of retribution.

● Policies and procedures to implement and monitor the quality of employee performance.

● Systems of corporate oversight or other oversight structures and strong internal controls.

● Recruitment procedures emphasizing the importance of employing high caliber competent personnel.

● Timely communication of policies and procedures, including any changes to them, to all employees, and appropriate training and education on such policies and procedures.

● Ethics and code of conduct policies.

200.7 A4 Professional accountants might consider obtaining legal advice where they believe that unethical behavior or actions by others have occurred, or will continue to occur, within the employing organization.

Addressing Threats

200.8 A1 Sections 210 to 270 describe certain threats that might arise during the course of performing professional activities and include examples of actions that might address such threats.

200.8 A2 In extreme situations, if the circumstances that created the threats cannot be eliminated and safeguards are not available or capable of being applied to reduce the threat to an acceptable level, it might be appropriate for a professional accountant to resign from the employing organization.

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Communicating with Those Charged with Governance

R200.9 When communicating with those charged with governance in accordance with the Code, a professional accountant shall determine the appropriate individual(s) within the employing organization’s governance structure with whom to communicate. If the accountant communicates with a subgroup of those charged with governance, the accountant shall determine whether communication with all of those charged with governance is also necessary so that they are adequately informed.

200.9 A1 In determining with whom to communicate, a professional accountant might consider:

(a) The nature and importance of the circumstances; and

(b) The matter to be communicated.

200.9 A2 Examples of a subgroup of those charged with governance include an audit committee or an individual member of those charged with governance.

R200.10 If a professional accountant communicates with individuals who have management responsibilities as well as governance responsibilities, the accountant shall be satisfied that communication with those individuals adequately informs all of those in a governance role with whom the accountant would otherwise communicate.

200.10 A1 In some circumstances, all of those charged with governance are involved in managing the employing organization, for example, a small business where a single owner manages the organization and no one else has a governance role. In these cases, if matters are communicated with individual(s) with management responsibilities, and those individual(s) also have governance responsibilities, the professional accountant has satisfied the requirement to communicate with those charged with governance.

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SECTION 210

CONFLICTS OF INTEREST

Introduction210.1 Professional accountants are required to comply with the fundamental

principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats.

210.2 A conflict of interest creates threats to compliance with the principle of objectivity and might create threats to compliance with the other fundamental principles. Such threats might be created when:

(a) A professional accountant undertakes a professional activity related to a particular matter for two or more parties whose interests with respect to that matter are in conflict; or

(b) The interest of a professional accountant with respect to a particular matter and the interests of a party for whom the accountant undertakes a professional activity related to that matter are in conflict.

A party might include an employing organization, a vendor, a customer, a lender, a shareholder, or another party.

210.3 This section sets out specific requirements and application material relevant to applying the conceptual framework to conflicts of interest.


R210.4 A professional accountant shall not allow a conflict of interest to compromise professional or business judgment.

210.4 A1 Examples of circumstances that might create a conflict of interest include:

● Serving in a management or governance position for two employing organizations and acquiring confidential information from one organization that might be used by the professional accountant to the advantage or disadvantage of the other organization.

● Undertaking a professional activity for each of two parties in a partnership, where both parties are employing the accountant to assist them to dissolve their partnership.

● Preparing financial information for certain members of management of the accountant’s employing organization who are seeking to undertake a management buy-out.

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● Being responsible for selecting a vendor for the employing organization when an immediate family member of the accountant might benefit financially from the transaction.

● Serving in a governance capacity in an employing organization that is approving certain investments for the company where one of those investments will increase the value of the investment portfolio of the accountant or an immediate family member.

Conflict Identification

R210.5 A professional accountant shall take reasonable steps to identify circumstances that might create a conflict of interest, and therefore a threat to compliance with one or more of the fundamental principles. Such steps shall include identifying:

(a) The nature of the relevant interests and relationships between the parties involved; and

(b) The activity and its implication for relevant parties.

R210.6 A professional accountant shall remain alert to changes over time in the nature of the activities, interests and relationships that might create a conflict of interest while performing a professional activity.

Threats Created by Conflicts of Interest

210.7 A1 In general, the more direct the connection between the professional activity and the matter on which the parties’ interests conflict, the more likely the level of the threat is not at an acceptable level.

210.7 A2 An example of an action that might eliminate threats created by conflicts of interest is withdrawing from the decision-making process related to the matter giving rise to the conflict of interest.

210.7 A3 Examples of actions that might be safeguards to address threats created by conflicts of interest include:

● Restructuring or segregating certain responsibilities and duties.

● Obtaining appropriate oversight, for example, acting under the supervision of an executive or non-executive director.

Disclosure and Consent

General

210.8 A1 It is generally necessary to:

(a) Disclose the nature of the conflict of interest and how any threats created were addressed to the relevant parties, including to the

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appropriate levels within the employing organization affected by a conflict; and

(b) Obtain consent from the relevant parties for the professional accountant to undertake the professional activity when safeguards are applied to address the threat.

210.8 A2 Consent might be implied by a party’s conduct in circumstances where the professional accountant has sufficient evidence to conclude that the parties know the circumstances at the outset and have accepted the conflict of interest if they do not raise an objection to the existence of the conflict.

210.8 A3 If such disclosure or consent is not in writing, the professional accountant is encouraged to document:

(a) The nature of the circumstances giving rise to the conflict of interest;

(b) The safeguards applied to address the threats when applicable; and

(c) The consent obtained.

Other Considerations

210.9 A1 When addressing a conflict of interest, the professional accountant is encouraged to seek guidance from within the employing organization or from others, such as a professional body, legal counsel or another accountant. When making such disclosures or sharing information within the employing organization and seeking guidance of third parties, the principle of confidentiality applies.

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SECTION 220

PREPARATION AND PRESENTATION OF INFORMATION



220.2 Preparing or presenting information might create a self-interest, intimidation or other threats to compliance with one or more of the fundamental principles. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.


220.3 A1 Professional accountants at all levels in an employing organization are involved in the preparation or presentation of information both within and outside the organization.

220.3 A2 Stakeholders to whom, or for whom, such information is prepared or presented, include:

● Management and those charged with governance.

● Investors and lenders or other creditors.

● Regulatory bodies.

This information might assist stakeholders in understanding and evaluating aspects of the employing organization’s state of affairs and in making decisions concerning the organization. Information can include financial and non-financial information that might be made public or used for internal purposes.

Examples include:

● Operating and performance reports.

● Decision support analyses.

● Budgets and forecasts.

● Information provided to the internal and external auditors.

● Risk analyses.

● General and special purpose financial statements.

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● Tax returns.

● Reports filed with regulatory bodies for legal and compliance purposes.

220.3 A3 For the purposes of this section, preparing or presenting information includes recording, maintaining and approving information.

R220.4 When preparing or presenting information, a professional accountant shall:

(a) Prepare or present the information in accordance with a relevant reporting framework, where applicable;

(b) Prepare or present the information in a manner that is intended neither to mislead nor to influence contractual or regulatory outcomes inappropriately;

(c) Exercise professional judgment to:

(i) Represent the facts accurately and completely in all material respects;

(ii) Describe clearly the true nature of business transactions or activities; and

(iii) Classify and record information in a timely and proper manner; and

(d) Not omit anything with the intention of rendering the information misleading or of influencing contractual or regulatory outcomes inappropriately.

220.4 A1 An example of influencing a contractual or regulatory outcome inappropriately is using an unrealistic estimate with the intention of avoiding violation of a contractual requirement such as a debt covenant or of a regulatory requirement such as a capital requirement for a financial institution.

Use of Discretion in Preparing or Presenting Information

R220.5 Preparing or presenting information might require the exercise of discretion in making professional judgments. The professional accountant shall not exercise such discretion with the intention of misleading others or influencing contractual or regulatory outcomes inappropriately.

220.5 A1 Examples of ways in which discretion might be misused to achieve inappropriate outcomes include:

● Determining estimates, for example, determining fair value estimates in order to misrepresent profit or loss.

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● Selecting or changing an accounting policy or method among two or more alternatives permitted under the applicable financial reporting framework, for example, selecting a policy for accounting for long-term contracts in order to misrepresent profit or loss.

● Determining the timing of transactions, for example, timing the sale of an asset near the end of the fiscal year in order to mislead.

● Determining the structuring of transactions, for example, structuring financing transactions in order to misrepresent assets and liabilities or classification of cash flows.

● Selecting disclosures, for example, omitting or obscuring information relating to financial or operating risk in order to mislead.

R220.6 When performing professional activities, especially those that do not require compliance with a relevant reporting framework, the professional accountant shall exercise professional judgment to identify and consider:

(a) The purpose for which the information is to be used;

(b) The context within which it is given; and

(c) The audience to whom it is addressed.

220.6 A1 For example, when preparing or presenting pro forma reports, budgets or forecasts, the inclusion of relevant estimates, approximations and assumptions, where appropriate, would enable those who might rely on such information to form their own judgments.

220.6 A2 The professional accountant might also consider clarifying the intended audience, context and purpose of the information to be presented.

Relying on the Work of Others

R220.7 A professional accountant who intends to rely on the work of others, either internal or external to the employing organization, shall exercise professional judgment to determine what steps to take, if any, in order to fulfill the responsibilities set out in paragraph R220.4.

220.7 A1 Factors to consider in determining whether reliance on others is reasonable include:

● The reputation and expertise of, and resources available to, the other individual or organization.

● Whether the other individual is subject to applicable professional and ethics standards.

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Such information might be gained from prior association with, or from consulting others about, the other individual or organization.

Addressing Information that Is or Might be Misleading

R220.8 When the professional accountant knows or has reason to believe that the information with which the accountant is associated is misleading, the accountant shall take appropriate actions to seek to resolve the matter.

220.8 A1 Actions that might be appropriate include:

● Discussing concerns that the information is misleading with the professional accountant’s superior and/or the appropriate level(s) of management within the accountant’s employing organization or those charged with governance, and requesting such individuals to take appropriate action to resolve the matter. Such action might include:

○ Having the information corrected.

○ If the information has already been disclosed to the intended users, informing them of the correct information.

● Consulting the policies and procedures of the employing organization (for example, an ethics or whistle-blowing policy) regarding how to address such matters internally.

220.8 A2 The professional accountant might determine that the employing organization has not taken appropriate action. If the accountant continues to have reason to believe that the information is misleading, the following further actions might be appropriate provided that the accountant remains alert to the principle of confidentiality:

● Consulting with:

○ A relevant professional body.

○ The internal or external auditor of the employing organization.

○ Legal counsel.

● Determining whether any requirements exist to communicate to:

○ Third parties, including users of the information.

○ Regulatory and oversight authorities.

R220.9 If after exhausting all feasible options, the professional accountant determines that appropriate action has not been taken and there is

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reason to believe that the information is still misleading, the accountant shall refuse to be or to remain associated with the information.

220.9 A1 In such circumstances, it might be appropriate for a professional accountant to resign from the employing organization.

Documentation

220.10 A1 The professional accountant is encouraged to document:

● The facts.

● The accounting principles or other relevant professional standards involved.

● The communications and parties with whom matters were discussed.

● The courses of action considered.

● How the accountant attempted to address the matter(s).


220.11 A1 Where threats to compliance with the fundamental principles relating to the preparation or presentation of information arise from a financial interest, including compensation and incentives linked to financial reporting and decision making, the requirements and application material set out in Section 240 apply.

220.11 A2 Where the misleading information might involve non-compliance with laws and regulations, the requirements and application material set out in Section 260 apply.

220.11 A3 Where threats to compliance with the fundamental principles relating to the preparation or presentation of information arise from pressure, the requirements and application material set out in Section 270 apply.

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SECTION 230

ACTING WITH SUFFICIENT EXPERTISE



230.2 Acting without sufficient expertise creates a self-interest threat to compliance with the principle of professional competence and due care. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.


R230.3 A professional accountant shall not intentionally mislead an employing organization as to the level of expertise or experience possessed.

230.3 A1 The principle of professional competence and due care requires that a professional accountant only undertake significant tasks for which the accountant has, or can obtain, sufficient training or experience.

230.3 A2 A self-interest threat to compliance with the principle of professional competence and due care might be created if a professional accountant has:

● Insufficient time for performing or completing the relevant duties.

● Incomplete, restricted or otherwise inadequate information for performing the duties.

● Insufficient experience, training and/or education.

● Inadequate resources for the performance of the duties.

230.3 A3 Factors that are relevant in evaluating the level of such a threat include:

● The extent to which the professional accountant is working with others.

● The relative seniority of the accountant in the business.

● The level of supervision and review applied to the work.

230.3 A4 Examples of actions that might be safeguards to address such a self-interest threat include:

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● Obtaining assistance or training from someone with the necessary expertise.

● Ensuring that there is adequate time available for performing the relevant duties.

R230.4 If a threat to compliance with the principle of professional competence and due care cannot be addressed, a professional accountant shall determine whether to decline to perform the duties in question. If the accountant determines that declining is appropriate, the accountant shall communicate the reasons.


230.5 A1 The requirements and application material in Section 270 apply when a professional accountant is pressured to act in a manner that might lead to a breach of the principle of professional competence and due care.

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SECTION 240

FINANCIAL INTERESTS, COMPENSATION AND INCENTIVES LINKED TO FINANCIAL REPORTING AND DECISION MAKING



240.2 Having a financial interest, or knowing of a financial interest held by an immediate or close family member might create a self-interest threat to compliance with the principles of objectivity or confidentiality. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.


R240.3 A professional accountant shall not manipulate information or use confidential information for personal gain or for the financial gain of others.

240.3 A1 Professional accountants might have financial interests or might know of financial interests of immediate or close family members that, in certain circumstances, might create threats to compliance with the fundamental principles. Financial interests include those arising from compensation or incentive arrangements linked to financial reporting and decision making.

240.3 A2 Examples of circumstances that might create a self-interest threat include situations in which the professional accountant or an immediate or close family member:

● Has a motive and opportunity to manipulate price-sensitive information in order to gain financially.

● Holds a direct or indirect financial interest in the employing organization and the value of that financial interest might be directly affected by decisions made by the accountant.

● Is eligible for a profit-related bonus and the value of that bonus might be directly affected by decisions made by the accountant.

● Holds, directly or indirectly, deferred bonus share rights or share options in the employing organization, the value of which might be affected by decisions made by the accountant.

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● Participates in compensation arrangements which provide incentives to achieve targets or to support efforts to maximize the value of the employing organization’s shares. An example of such an arrangement might be through participation in incentive plans which are linked to certain performance conditions being met.


● The significance of the financial interest. What constitutes a significant financial interest will depend on personal circumstances and the materiality of the financial interest to the individual.

● Policies and procedures for a committee independent of management to determine the level or form of senior management remuneration.

● In accordance with any internal policies, disclosure to those charged with governance of:

○ All relevant interests.

○ Any plans to exercise entitlements or trade in relevant shares.

● Internal and external audit procedures that are specific to address issues that give rise to the financial interest.

240.3 A4 Threats created by compensation or incentive arrangements might be compounded by explicit or implicit pressure from superiors or colleagues. See Section 270, Pressure to Breach the Fundamental Principles.

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SECTION 250

INDUCEMENTS, INCLUDING GIFTS AND HOSPITALITY



250.2 Offering or accepting inducements might create a self-interest, familiarity or intimidation threat to compliance with the fundamental principles, particularly the principles of integrity, objectivity and professional behavior.

250.3 This section sets out requirements and application material relevant to applying the conceptual framework in relation to the offering and accepting of inducements when undertaking professional activities that does not constitute non-compliance with laws and regulations. This section also requires a professional accountant to comply with relevant laws and regulations when offering or accepting inducements.


250.4 A1 An inducement is an object, situation, or action that is used as a means to influence another individual’s behavior, but not necessarily with the intent to improperly influence that individual’s behavior. Inducements can range from minor acts of hospitality between business colleagues to acts that result in non-compliance with laws and regulations. An inducement can take many different forms, for example:

● Gifts.

● Hospitality.

● Entertainment.

● Political or charitable donations.

● Appeals to friendship and loyalty.

● Employment or other commercial opportunities.

● Preferential treatment, rights or privileges.

Inducements Prohibited by Laws and Regulations

R250.5 In many jurisdictions, there are laws and regulations, such as those related to bribery and corruption, that prohibit the offering or accepting of inducements in certain circumstances. The professional accountant

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shall obtain an understanding of relevant laws and regulations and comply with them when the accountant encounters such circumstances.

Inducements Not Prohibited by Laws and Regulations

250.6 A1 The offering or accepting of inducements that is not prohibited by laws and regulations might still create threats to compliance with the fundamental principles.

Inducements with Intent to Improperly Influence Behavior

R250.7 A professional accountant shall not offer, or encourage others to offer, any inducement that is made, or which the accountant considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behavior of the recipient or of another individual.

R250.8 A professional accountant shall not accept, or encourage others to accept, any inducement that the accountant concludes is made, or considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behavior of the recipient or of another individual.

250.9 A1 An inducement is considered as improperly influencing an individual’s behavior if it causes the individual to act in an unethical manner. Such improper influence can be directed either towards the recipient or towards another individual who has some relationship with the recipient. The fundamental principles are an appropriate frame of reference for a professional accountant in considering what constitutes unethical behavior on the part of the accountant and, if necessary by analogy, other individuals.

250.9 A2 A breach of the fundamental principle of integrity arises when a professional accountant offers or accepts, or encourages others to offer or accept, an inducement where the intent is to improperly influence the behavior of the recipient or of another individual.

250.9 A3 The determination of whether there is actual or perceived intent to improperly influence behavior requires the exercise of professional judgment. Relevant factors to consider might include:

● The nature, frequency, value and cumulative effect of the inducement.

● Timing of when the inducement is offered relative to any action or decision that it might influence.

● Whether the inducement is a customary or cultural practice in the circumstances, for example, offering a gift on the occasion of a religious holiday or wedding.

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● Whether the inducement is an ancillary part of a professional activity, for example, offering or accepting lunch in connection with a business meeting.

● Whether the offer of the inducement is limited to an individual recipient or available to a broader group. The broader group might be internal or external to the employing organization, such as other customers or vendors.

● The roles and positions of the individuals offering or being offered the inducement.

● Whether the professional accountant knows, or has reason to believe, that accepting the inducement would breach the policies and procedures of the counterparty’s employing organization.

● The degree of transparency with which the inducement is offered.

● Whether the inducement was required or requested by the recipient.

● The known previous behavior or reputation of the offeror.

Consideration of Further Actions

250.10 A1 If the professional accountant becomes aware of an inducement offered with actual or perceived intent to improperly influence behavior, threats to compliance with the fundamental principles might still be created even if the requirements in paragraphs R250.7 and R250.8 are met.

250.10 A2 Examples of actions that might be safeguards to address such threats include:

● Informing senior management or those charged with governance of the employing organization of the professional accountant or the offeror regarding the offer.

● Amending or terminating the business relationship with the offeror.

Inducements with No Intent to Improperly Influence Behavior

250.11 A1 The requirements and application material set out in the conceptual framework apply when a professional accountant has concluded there is no actual or perceived intent to improperly influence the behavior of the recipient or of another individual.

250.11 A2 If such an inducement is trivial and inconsequential, any threats created will be at an acceptable level.

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250.11 A3 Examples of circumstances where offering or accepting such an inducement might create threats even if the professional accountant has concluded there is no actual or perceived intent to improperly influence behavior include:

● Self-interest threats

○ A professional accountant is offered part-time employment by a vendor.

● Familiarity threats

○ A professional accountant regularly takes a customer or supplier to sporting events.

● Intimidation threats

○ A professional accountant accepts hospitality, the nature of which could be perceived to be inappropriate were it to be publicly disclosed.

250.11 A4 Relevant factors in evaluating the level of such threats created by offering or accepting such an inducement include the same factors set out in paragraph 250.9 A3 for determining intent.

250.11 A5 Examples of actions that might eliminate threats created by offering or accepting such an inducement include:

● Declining or not offering the inducement.

● Transferring responsibility for any business-related decision involving the counterparty to another individual who the professional accountant has no reason to believe would be, or would be perceived to be, improperly influenced in making the decision.

250.11 A6 Examples of actions that might be safeguards to address such threats created by offering or accepting such an inducement include:

● Being transparent with senior management or those charged with governance of the employing organization of the professional accountant or of the counterparty about offering or accepting an inducement.

● Registering the inducement in a log maintained by the employing organization of the accountant or the counterparty.

● Having an appropriate reviewer, who is not otherwise involved in undertaking the professional activity, review any work performed or decisions made by the accountant with respect to the individual or organization from which the accountant accepted the inducement. 84

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● Donating the inducement to charity after receipt and appropriately disclosing the donation, for example, to those charged with governance or the individual who offered the inducement.

● Reimbursing the cost of the inducement, such as hospitality, received.

● As soon as possible, returning the inducement, such as a gift, after it was initially accepted.

Immediate or Close Family Members

R250.12 A professional accountant shall remain alert to potential threats to the accountant’s compliance with the fundamental principles created by the offering of an inducement:

(a) By an immediate or close family member of the accountant to a counterparty with whom the accountant has a professional relationship; or

(b) To an immediate or close family member of the accountant by a counterparty with whom the accountant has a professional relationship.

R250.13 Where the professional accountant becomes aware of an inducement being offered to or made by an immediate or close family member and concludes there is intent to improperly influence the behavior of the accountant or of the counterparty, or considers a reasonable and informed third party would be likely to conclude such intent exists, the accountant shall advise the immediate or close family member not to offer or accept the inducement.

250.13 A1 The factors set out in paragraph 250.9 A3 are relevant in determining whether there is actual or perceived intent to improperly influence the behavior of the professional accountant or of the counterparty. Another factor that is relevant is the nature or closeness of the relationship, between:

(a) The accountant and the immediate or close family member;

(b) The immediate or close family member and the counterparty; and

(c) The accountant and the counterparty.

For example, the offer of employment, outside of the normal recruitment process, to the spouse of the accountant by a counterparty with whom the accountant is negotiating a significant contract might indicate such intent.

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250.13 A2 The application material in paragraph 250.10 A2 is also relevant in addressing threats that might be created when there is actual or perceived intent to improperly influence the behavior of the professional accountant or of the counterparty even if the immediate or close family member has followed the advice given pursuant to paragraph R250.13.

Application of the Conceptual Framework

250.14 A1 Where the professional accountant becomes aware of an inducement offered in the circumstances addressed in paragraph R250.12, threats to compliance with the fundamental principles might be created where:

(a) The immediate or close family member offers or accepts the inducement contrary to the advice of the accountant pursuant to paragraph R250.13; or

(b) The accountant does not have reason to believe an actual or perceived intent to improperly influence the behavior of the accountant or of the counterparty exists.

250.14 A2 The application material in paragraphs 250.11 A1 to 250.11 A6 is relevant for the purposes of identifying, evaluating and addressing such threats. Factors that are relevant in evaluating the level of threats in these circumstances also include the nature or closeness of the relationships set out in paragraph 250.13 A1.


250.15 A1 If a professional accountant is offered an inducement by the employing organization relating to financial interests, compensation and incentives linked to performance, the requirements and application material set out in Section 240 apply.

250.15 A2 If a professional accountant encounters or is made aware of inducements that might result in non-compliance or suspected non-compliance with laws and regulations by other individuals working for or under the direction of the employing organization, the requirements and application material set out in Section 260 apply.

250.15 A3 If a professional accountant faces pressure to offer or accept inducements that might create threats to compliance with the fundamental principles, the requirements and application material set out in Section 270 apply.

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SECTION 260

RESPONDING TO NON-COMPLIANCE WITH LAWS AND REGULATIONS



260.2 A self-interest or intimidation threat to compliance with the principles of integrity and professional behavior is created when a professional accountant becomes aware of non-compliance or suspected non-compliance with laws and regulations.

260.3 A professional accountant might encounter or be made aware of non-compliance or suspected non-compliance in the course of carrying out professional activities. This section guides the accountant in assessing the implications of the matter and the possible courses of action when responding to non-compliance or suspected non-compliance with:

(a) Laws and regulations generally recognized to have a direct effect on the determination of material amounts and disclosures in the employing organization’s financial statements; and

(b) Other laws and regulations that do not have a direct effect on the determination of the amounts and disclosures in the employing organization’s financial statements, but compliance with which might be fundamental to the operating aspects of the employing organization’s business, to its ability to continue its business, or to avoid material penalties.

Objectives of the Professional Accountant in Relation to Non-compliance with Laws and Regulations

260.4 A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. When responding to non-compliance or suspected non-compliance, the objectives of the professional accountant are:

(a) To comply with the principles of integrity and professional behavior;

(b) By alerting management or, where appropriate, those charged with governance of the employing organization, to seek to:

(i) Enable them to rectify, remediate or mitigate the consequences of the identified or suspected non-compliance; or87

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(ii) Deter the non-compliance where it has not yet occurred; and

(c) To take such further action as appropriate in the public interest.


260.5 A1 Non-compliance with laws and regulations (“non-compliance”) comprises acts of omission or commission, intentional or unintentional, which are contrary to the prevailing laws or regulations committed by the following parties:

(a) The professional accountant’s employing organization;

(b) Those charged with governance of the employing organization;

(c) Management of the employing organization; or

(d) Other individuals working for or under the direction of the employing organization.

260.5 A2 Examples of laws and regulations which this section addresses include those that deal with:

● Fraud, corruption and bribery.

● Money laundering, terrorist financing and proceeds of crime.

● Securities markets and trading.

● Banking and other financial products and services.

● Data protection.

● Tax and pension liabilities and payments.

● Environmental protection.

● Public health and safety.

260.5 A3 Non-compliance might result in fines, litigation or other consequences for the employing organization, potentially materially affecting its financial statements. Importantly, such non-compliance might have wider public interest implications in terms of potentially substantial harm to investors, creditors, employees or the general public. For the purposes of this section, non-compliance that causes substantial harm is one that results in serious adverse consequences to any of these parties in financial or non-financial terms. Examples include the perpetration of a fraud resulting in significant financial losses to investors, and breaches of environmental laws and regulations endangering the health or safety of employees or the public.

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R260.6 In some jurisdictions, there are legal or regulatory provisions governing how professional accountants are required to address non-compliance or suspected non-compliance. These legal or regulatory provisions might differ from or go beyond the provisions in this section. When encountering such non-compliance or suspected non-compliance, the accountant shall obtain an understanding of those legal or regulatory provisions and comply with them, including:

(a) Any requirement to report the matter to an appropriate authority; and

(b) Any prohibition on alerting the relevant party.

260.6 A1 A prohibition on alerting the relevant party might arise, for example, pursuant to anti-money laundering legislation.

260.7 A1 This section applies regardless of the nature of the employing organization, including whether or not it is a public interest entity.

260.7 A2 A professional accountant who encounters or is made aware of matters that are clearly inconsequential is not required to comply with this section. Whether a matter is clearly inconsequential is to be judged with respect to its nature and its impact, financial or otherwise, on the employing organization, its stakeholders and the general public.

260.7 A3 This section does not address:

(a) Personal misconduct unrelated to the business activities of the employing organization; and

(b) Non-compliance by parties other than those specified in paragraph 260.5 A1.

The professional accountant might nevertheless find the guidance in this section helpful in considering how to respond in these situations.

Responsibilities of the Employing Organization’s Management and Those Charged with Governance

260.8 A1 The employing organization’s management, with the oversight of those charged with governance, is responsible for ensuring that the employing organization’s business activities are conducted in accordance with laws and regulations. Management and those charged with governance are also responsible for identifying and addressing any non-compliance by:

(a) The employing organization;

(b) An individual charged with governance of the employing organization;

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(d) Other individuals working for or under the direction of the employing organization.

Responsibilities of All Professional Accountants

R260.9 If protocols and procedures exist within the professional accountant’s employing organization to address non-compliance or suspected non-compliance, the accountant shall consider them in determining how to respond to such non-compliance.

260.9 A1 Many employing organizations have established protocols and procedures regarding how to raise non-compliance or suspected non-compliance internally. These protocols and procedures include, for example, an ethics policy or internal whistle-blowing mechanism. Such protocols and procedures might allow matters to be reported anonymously through designated channels.

R260.10 Where a professional accountant becomes aware of a matter to which this section applies, the steps that the accountant takes to comply with this section shall be taken on a timely basis. For the purpose of taking timely steps, the accountant shall have regard to the nature of the matter and the potential harm to the interests of the employing organization, investors, creditors, employees or the general public.

Responsibilities of Senior Professional Accountants in Business

260.11 A1 Senior professional accountants in business (“senior professional accountants”) are directors, officers or senior employees able to exert significant influence over, and make decisions regarding, the acquisition, deployment and control of the employing organization’s human, financial, technological, physical and intangible resources. There is a greater expectation for such individuals to take whatever action is appropriate in the public interest to respond to non-compliance or suspected non-compliance than other professional accountants within the employing organization. This is because of senior professional accountants’ roles, positions and spheres of influence within the employing organization.

Obtaining an Understanding of the Matter

R260.12 If, in the course of carrying out professional activities, a senior professional accountant becomes aware of information concerning non-compliance or suspected non-compliance, the accountant shall obtain an understanding of the matter. This understanding shall include:

(a) The nature of the non-compliance or suspected non-compliance and the circumstances in which it has occurred or might occur;

(b) The application of the relevant laws and regulations to the circumstances; and90

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(c) An assessment of the potential consequences to the employing organization, investors, creditors, employees or the wider public.

260.12 A1 A senior professional accountant is expected to apply knowledge and expertise, and exercise professional judgment. However, the accountant is not expected to have a level of understanding of laws and regulations greater than that which is required for the accountant’s role within the employing organization. Whether an act constitutes non-compliance is ultimately a matter to be determined by a court or other appropriate adjudicative body.

260.12 A2 Depending on the nature and significance of the matter, the senior professional accountant might cause, or take appropriate steps to cause, the matter to be investigated internally. The accountant might also consult on a confidential basis with others within the employing organization or a professional body, or with legal counsel.

Addressing the Matter

R260.13 If the senior professional accountant identifies or suspects that non-compliance has occurred or might occur, the accountant shall, subject to paragraph R260.9, discuss the matter with the accountant’s immediate superior, if any. If the accountant’s immediate superior appears to be involved in the matter, the accountant shall discuss the matter with the next higher level of authority within the employing organization.

260.13 A1 The purpose of the discussion is to enable a determination to be made as to how to address the matter.

R260.14 The senior professional accountant shall also take appropriate steps to:

(a) Have the matter communicated to those charged with governance;

(b) Comply with applicable laws and regulations, including legal or regulatory provisions governing the reporting of non-compliance or suspected non-compliance to an appropriate authority;

(c) Have the consequences of the non-compliance or suspected non-compliance rectified, remediated or mitigated;

(d) Reduce the risk of re-occurrence; and

(e) Seek to deter the commission of the non-compliance if it has not yet occurred.

260.14 A1 The purpose of communicating the matter to those charged with governance is to obtain their concurrence regarding appropriate actions to take to respond to the matter and to enable them to fulfill their responsibilities.

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260.14 A2 Some laws and regulations might stipulate a period within which reports of non-compliance or suspected non-compliance are to be made to an appropriate authority.

R260.15 In addition to responding to the matter in accordance with the provisions of this section, the senior professional accountant shall determine whether disclosure of the matter to the employing organization’s external auditor, if any, is needed.

260.15 A1 Such disclosure would be pursuant to the senior professional accountant’s duty or legal obligation to provide all information necessary to enable the auditor to perform the audit.

Determining Whether Further Action Is Needed

R260.16 The senior professional accountant shall assess the appropriateness of the response of the accountant’s superiors, if any, and those charged with governance.

260.16 A1 Relevant factors to consider in assessing the appropriateness of the response of the senior professional accountant’s superiors, if any, and those charged with governance include whether:

● The response is timely.

● They have taken or authorized appropriate action to seek to rectify, remediate or mitigate the consequences of the non-compliance, or to avert the non-compliance if it has not yet occurred.

● The matter has been disclosed to an appropriate authority where appropriate and, if so, whether the disclosure appears adequate.

R260.17 In light of the response of the senior professional accountant’s superiors, if any, and those charged with governance, the accountant shall determine if further action is needed in the public interest.

260.17 A1 The determination of whether further action is needed, and the nature and extent of it, will depend on various factors, including:

● The legal and regulatory framework.

● The urgency of the situation.

● The pervasiveness of the matter throughout the employing organization.

● Whether the senior professional accountant continues to have confidence in the integrity of the accountant’s superiors and those charged with governance.

● Whether the non-compliance or suspected non-compliance is likely to recur.

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● Whether there is credible evidence of actual or potential substantial harm to the interests of the employing organization, investors, creditors, employees or the general public.

260.17 A2 Examples of circumstances that might cause the senior professional accountant no longer to have confidence in the integrity of the accountant’s superiors and those charged with governance include situations where:

● The accountant suspects or has evidence of their involvement or intended involvement in any non-compliance.

● Contrary to legal or regulatory requirements, they have not reported, or authorized the reporting of, the matter to an appropriate authority within a reasonable period.

R260.18 The senior professional accountant shall exercise professional judgment in determining the need for, and nature and extent of, further action. In making this determination, the accountant shall take into account whether a reasonable and informed third party would be likely to conclude that the accountant has acted appropriately in the public interest.

260.18 A1 Further action that the senior professional accountant might take includes:

● Informing the management of the parent entity of the matter if the employing organization is a member of a group.

● Disclosing the matter to an appropriate authority even when there is no legal or regulatory requirement to do so.

● Resigning from the employing organization.

260.18 A2 Resigning from the employing organization is not a substitute for taking other actions that might be needed to achieve the senior professional accountant’s objectives under this section. In some jurisdictions, however, there might be limitations as to the further actions available to the accountant. In such circumstances, resignation might be the only available course of action.

Seeking Advice

260.19 A1 As assessment of the matter might involve complex analysis and judgments, the senior professional accountant might consider:

● Consulting internally.

● Obtaining legal advice to understand the accountant’s options and the professional or legal implications of taking any particular course of action.

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● Consulting on a confidential basis with a regulatory or professional body.

Determining Whether to Disclose the Matter to an Appropriate Authority

260.20 A1 Disclosure of the matter to an appropriate authority would be precluded if doing so would be contrary to law or regulation. Otherwise, the purpose of making disclosure is to enable an appropriate authority to cause the matter to be investigated and action to be taken in the public interest.

260.20 A2 The determination of whether to make such a disclosure depends in particular on the nature and extent of the actual or potential harm that is or might be caused by the matter to investors, creditors, employees or the general public. For example, the senior professional accountant might determine that disclosure of the matter to an appropriate authority is an appropriate course of action if:

● The employing organization is engaged in bribery (for example, of local or foreign government officials for purposes of securing large contracts).

● The employing organization is regulated and the matter is of such significance as to threaten its license to operate.

● The employing organization is listed on a securities exchange and the matter might result in adverse consequences to the fair and orderly market in the employing organization’s securities or pose a systemic risk to the financial markets.

● It is likely that the employing organization would sell products that are harmful to public health or safety.

● The employing organization is promoting a scheme to its clients to assist them in evading taxes.

260.20 A3 The determination of whether to make such a disclosure will also depend on external factors such as:

● Whether there is an appropriate authority that is able to receive the information, and cause the matter to be investigated and action to be taken. The appropriate authority will depend upon the nature of the matter. For example, the appropriate authority would be a securities regulator in the case of fraudulent financial reporting or an environmental protection agency in the case of a breach of environmental laws and regulations.

● Whether there exists robust and credible protection from civil, criminal or professional liability or retaliation afforded by legislation or regulation, such as under whistle-blowing legislation or regulation.94

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● Whether there are actual or potential threats to the physical safety of the senior professional accountant or other individuals.

R260.21 If the senior professional accountant determines that disclosure of the matter to an appropriate authority is an appropriate course of action in the circumstances, that disclosure is permitted pursuant to paragraph R114.1(d) of the Code. When making such disclosure, the accountant shall act in good faith and exercise caution when making statements and assertions.

Imminent Breach

R260.22 In exceptional circumstances, the senior professional accountant might become aware of actual or intended conduct that the accountant has reason to believe would constitute an imminent breach of a law or regulation that would cause substantial harm to investors, creditors, employees or the general public. Having first considered whether it would be appropriate to discuss the matter with management or those charged with governance of the employing organization, the accountant shall exercise professional judgment and determine whether to disclose the matter immediately to an appropriate authority in order to prevent or mitigate the consequences of such imminent breach. If disclosure is made, that disclosure is permitted pursuant to paragraph R114.1(d) of the Code.

Documentation

260.23 A1 In relation to non-compliance or suspected non-compliance that falls within the scope of this section, the senior professional accountant is encouraged to have the following matters documented:

● The matter.

● The results of discussions with the accountant’s superiors, if any, and those charged with governance and other parties.

● How the accountant’s superiors, if any, and those charged with governance have responded to the matter.

● The courses of action the accountant considered, the judgments made and the decisions that were taken.

● How the accountant is satisfied that the accountant has fulfilled the responsibility set out in paragraph R260.17.

Responsibilities of Professional Accountants Other than Senior Professional Accountants

R260.24 If, in the course of carrying out professional activities, a professional accountant becomes aware of information concerning non-compliance

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or suspected non-compliance, the accountant shall seek to obtain an understanding of the matter. This understanding shall include the nature of the non-compliance or suspected non-compliance and the circumstances in which it has occurred or might occur.

260.24 A1 The professional accountant is expected to apply knowledge and expertise, and exercise professional judgment. However, the accountant is not expected to have a level of understanding of laws and regulations greater than that which is required for the accountant’s role within the employing organization. Whether an act constitutes non-compliance is ultimately a matter to be determined by a court or other appropriate adjudicative body.

260.24 A2 Depending on the nature and significance of the matter, the professional accountant might consult on a confidential basis with others within the employing organization or a professional body, or with legal counsel.

R260.25 If the professional accountant identifies or suspects that non-compliance has occurred or might occur, the accountant shall, subject to paragraph R260.9, inform an immediate superior to enable the superior to take appropriate action. If the accountant’s immediate superior appears to be involved in the matter, the accountant shall inform the next higher level of authority within the employing organization.

R260.26 In exceptional circumstances, the professional accountant may determine that disclosure of the matter to an appropriate authority is an appropriate course of action. If the accountant does so pursuant to paragraphs 260.20 A2 and A3, that disclosure is permitted pursuant to paragraph R114.1(d) of the Code. When making such disclosure, the accountant shall act in good faith and exercise caution when making statements and assertions.

Documentation

260.27 A1 In relation to non-compliance or suspected non-compliance that falls within the scope of this section, the professional accountant is encouraged to have the following matters documented:

● The matter.

● The results of discussions with the accountant’s superior, management and, where applicable, those charged with governance and other parties.

● How the accountant’s superior has responded to the matter.


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SECTION 270

PRESSURE TO BREACH THE FUNDAMENTAL PRINCIPLES



270.2 Pressure exerted on, or by, a professional accountant might create an intimidation or other threat to compliance with one or more of the fundamental principles. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.


R270.3 A professional accountant shall not:

(a) Allow pressure from others to result in a breach of compliance with the fundamental principles; or

(b) Place pressure on others that the accountant knows, or has reason to believe, would result in the other individuals breaching the fundamental principles.

270.3 A1 A professional accountant might face pressure that creates threats to compliance with the fundamental principles, for example an intimidation threat, when undertaking a professional activity. Pressure might be explicit or implicit and might come from:

● Within the employing organization, for example, from a colleague or superior.

● An external individual or organization such as a vendor, customer or lender.

● Internal or external targets and expectations.

270.3 A2 Examples of pressure that might result in threats to compliance with the fundamental principles include:

● Pressure related to conflicts of interest:

○ Pressure from a family member bidding to act as a vendor to the professional accountant’s employing organization to select the family member over another prospective vendor.

See also Section 210, Conflicts of Interest. 97

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● Pressure to influence preparation or presentation of information:

○ Pressure to report misleading financial results to meet investor, analyst or lender expectations.

○ Pressure from elected officials on public sector accountants to misrepresent programs or projects to voters.

○ Pressure from colleagues to misstate income, expenditure or rates of return to bias decision-making on capital projects and acquisitions.

○ Pressure from superiors to approve or process expenditures that are not legitimate business expenses.

○ Pressure to suppress internal audit reports containing adverse findings.

See also Section 220, Preparation and Presentation of Information.

● Pressure to act without sufficient expertise or due care:

○ Pressure from superiors to inappropriately reduce the extent of work performed.

○ Pressure from superiors to perform a task without sufficient skills or training or within unrealistic deadlines.

See also Section 230, Acting with Sufficient Expertise.

● Pressure related to financial interests:

○ Pressure from superiors, colleagues or others, for example, those who might benefit from participation in compensation or incentive arrangements to manipulate performance indicators.

See also Section 240, Financial Interests, Compensation and Incentives Linked to Financial Reporting and Decision Making.

● Pressure related to inducements:

○ Pressure from others, either internal or external to the employing organization, to offer inducements to influence inappropriately the judgment or decision making process of an individual or organization.

○ Pressure from colleagues to accept a bribe or other inducement, for example to accept inappropriate gifts or entertainment from potential vendors in a bidding process.

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See also Section 250, Inducements, Including Gifts and Hospitality.

● Pressure related to non-compliance with laws and regulations:

○ Pressure to structure a transaction to evade tax.

See also Section 260, Responding to Non-compliance with Laws and Regulations.

270.3 A3 Factors that are relevant in evaluating the level of threats created by pressure include:

● The intent of the individual who is exerting the pressure and the nature and extent of the pressure.

● The application of laws, regulations, and professional standards to the circumstances.

● The culture and leadership of the employing organization including the extent to which they reflect or emphasize the importance of ethical behavior and the expectation that employees will act ethically. For example, a corporate culture that tolerates unethical behavior might increase the likelihood that the pressure would result in a threat to compliance with the fundamental principles.

● Policies and procedures, if any, that the employing organization has established, such as ethics or human resources policies that address pressure.

270.3 A4 Discussing the circumstances creating the pressure and consulting with others about those circumstances might assist the professional accountant to evaluate the level of the threat. Such discussion and consultation, which requires being alert to the principle of confidentiality, might include:

● Discussing the matter with the individual who is exerting the pressure to seek to resolve it.

● Discussing the matter with the accountant’s superior, if the superior is not the individual exerting the pressure.

● Escalating the matter within the employing organization, including when appropriate, explaining any consequential risks to the organization, for example with:

○ Higher levels of management.

○ Internal or external auditors.

○ Those charged with governance. 99

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● Disclosing the matter in line with the employing organization’s policies, including ethics and whistleblowing policies, using any established mechanism, such as a confidential ethics hotline.

● Consulting with:

○ A colleague, superior, human resources personnel, or another professional accountant;

○ Relevant professional or regulatory bodies or industry associations; or

○ Legal counsel.

270.3 A5 An example of an action that might eliminate threats created by pressure is the professional accountant’s request for a restructure of, or segregation of, certain responsibilities and duties so that the accountant is no longer involved with the individual or entity exerting the pressure.

Documentation

270.4 A1 The professional accountant is encouraged to document:

● The facts.

● The communications and parties with whom these matters were discussed.

● The courses of action considered.

● How the matter was addressed.

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Page

Section 300 Applying the Conceptual Framework – Professional Accountants in Public Practice .................................................. 71

Section 310 Conflicts of Interest ................................................................... 78

Section 320 Professional Appointments ....................................................... 85

Section 321 Second Opinions ....................................................................... 89

Section 330 Fees and Other Types of Remuneration .................................... 90

Section 340 Inducements, Including Gifts and Hospitality .......................... 93

Section 350 Custody of Client Assets ........................................................... 99

Section 360 Responding to Non-compliance with Laws and Regulations ... 100

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PART 3 - PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE

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APPLYING THE CONCEPTUAL FRAMEWORK – PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE

Introduction 300.1 This Part of the Code sets out requirements and application material

for professional accountants in public practice when applying the conceptual framework set out in Section 120. It does not describe all of the facts and circumstances, including professional activities, interests and relationships, that could be encountered by professional accountants in public practice, which create or might create threats to compliance with the fundamental principles. Therefore, the conceptual framework requires professional accountants in public practice to be alert for such facts and circumstances.

300.2 The requirements and application material that apply to professional accountants in public practice are set out in:

● Part 3 – Professional Accountants in Public Practice, Sections 300 to 399, which applies to all professional accountants in public practice, whether they provide assurance services or not.

● International Independence Standards as follows:

○ Part 4A – Independence for Audit and Review Engagements, Sections 400 to 899, which applies to professional accountants in public practice when performing audit and review engagements.

○ Part 4B – Independence for Assurance Engagements Other than Audit and Review Engagements, Sections 900 to 999, which applies to professional accountants in public practice when performing assurance engagements other than audit or review engagements.

300.3 In this Part, the term “professional accountant” refers to individual professional accountants in public practice and their firms.


R300.4 A professional accountant shall comply with the fundamental principles set out in Section 110 and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to compliance with the fundamental principles. 102

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R300.5 When dealing with an ethics issue, the professional accountant shall consider the context in which the issue has arisen or might arise. Where an individual who is a professional accountant in public practice is performing professional activities pursuant to the accountant’s relationship with the firm, whether as a contractor, employee or owner, the individual shall comply with the provisions in Part 2 that apply to these circumstances.

300.5 A1 Examples of situations in which the provisions in Part 2 apply to a professional accountant in public practice include:

● Facing a conflict of interest when being responsible for selecting a vendor for the firm when an immediate family member of the accountant might benefit financially from the contract. The requirements and application material set out in Section 210 apply in these circumstances.

● Preparing or presenting financial information for the accountant’s client or firm. The requirements and application material set out in Section 220 apply in these circumstances.

● Being offered an inducement such as being regularly offered complimentary tickets to attend sporting events by a supplier of the firm. The requirements and application material set out in Section 250 apply in these circumstances.

● Facing pressure from an engagement partner to report chargeable hours inaccurately for a client engagement. The requirements and application material set out in Section 270 apply in these circumstances.

Identifying Threats

300.6 A1 Threats to compliance with the fundamental principles might be created by a broad range of facts and circumstances. The categories of threats are described in paragraph 120.6 A3. The following are examples of facts and circumstances within each of those categories of threats that might create threats for a professional accountant when undertaking a professional service:

(a) Self-interest Threats

● A professional accountant having a direct financial interest in a client.

● A professional accountant quoting a low fee to obtain a new engagement and the fee is so low that it might be difficult to perform the professional service in accordance with applicable technical and professional standards for that price. 103

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● A professional accountant having a close business relationship with a client.

● A professional accountant having access to confidential information that might be used for personal gain.

● A professional accountant discovering a significant error when evaluating the results of a previous professional service performed by a member of the accountant’s firm.

(b) Self-review Threats

● A professional accountant issuing an assurance report on the effectiveness of the operation of financial systems after implementing the systems.

● A professional accountant having prepared the original data used to generate records that are the subject matter of the assurance engagement.

(c) Advocacy Threats

● A professional accountant promoting the interests of, or shares in, a client.

● A professional accountant acting as an advocate on behalf of a client in litigation or disputes with third parties.

● A professional accountant lobbying in favor of legislation on behalf of a client.

(d) Familiarity Threats

● A professional accountant having a close or immediate family member who is a director or officer of the client.

● A director or officer of the client, or an employee in a position to exert significant influence over the subject matter of the engagement, having recently served as the engagement partner.

● An audit team member having a long association with the audit client.

(e) Intimidation Threats

● A professional accountant being threatened with dismissal from a client engagement or the firm because of a disagreement about a professional matter.

● A professional accountant feeling pressured to agree with the judgment of a client because the client has more expertise on the matter in question.104

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● A professional accountant being informed that a planned promotion will not occur unless the accountant agrees with an inappropriate accounting treatment.

● A professional accountant having accepted a significant gift from a client and being threatened that acceptance of this gift will be made public.

Evaluating Threats

300.7 A1 The conditions, policies and procedures described in paragraph 120.6 A1 and 120.8 A2 might impact the evaluation of whether a threat to compliance with the fundamental principles is at an acceptable level. Such conditions, policies and procedures might relate to:

(a) The client and its operating environment; and

(b) The firm and its operating environment.

300.7 A2 The professional accountant’s evaluation of the level of a threat is also impacted by the nature and scope of the professional service.

The Client and its Operating Environment

300.7 A3 The professional accountant’s evaluation of the level of a threat might be impacted by whether the client is:

(a) An audit client and whether the audit client is a public interest entity;

(b) An assurance client that is not an audit client; or

(c) A non-assurance client.

For example, providing a non-assurance service to an audit client that is a public interest entity might be perceived to result in a higher level of threat to compliance with the principle of objectivity with respect to the audit.

300.7 A4 The corporate governance structure, including the leadership of a client might promote compliance with the fundamental principles. Accordingly, a professional accountant’s evaluation of the level of a threat might also be impacted by a client’s operating environment. For example:

● The client requires appropriate individuals other than management to ratify or approve the appointment of a firm to perform an engagement.

● The client has competent employees with experience and seniority to make managerial decisions.

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● The client has implemented internal procedures that facilitate objective choices in tendering non-assurance engagements.

● The client has a corporate governance structure that provides appropriate oversight and communications regarding the firm’s services.

The Firm and its Operating Environment

300.7 A5 A professional accountant’s evaluation of the level of a threat might be impacted by the work environment within the accountant’s firm and its operating environment. For example:

● Leadership of the firm that promotes compliance with the fundamental principles and establishes the expectation that assurance team members will act in the public interest.

● Policies or procedures for establishing and monitoring compliance with the fundamental principles by all personnel.

● Compensation, performance appraisal and disciplinary policies and procedures that promote compliance with the fundamental principles.

● Management of the reliance on revenue received from a single client.

● The engagement partner having authority within the firm for decisions concerning compliance with the fundamental principles, including decisions about accepting or providing services to a client.

● Educational, training and experience requirements.

● Processes to facilitate and address internal and external concerns or complaints.

Consideration of New Information or Changes in Facts and Circumstances

300.7 A6 New information or changes in facts and circumstances might:

(a) Impact the level of a threat; or

(b) Affect the professional accountant’s conclusions about whether safeguards applied continue to address identified threats as intended.

In these situations, actions that were already implemented as safeguards might no longer be effective in addressing threats. Accordingly, the application of the conceptual framework requires that the professional accountant re-evaluate and address the threats accordingly. (Ref: Paras. R120.9 and R120.10).

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300.7 A7 Examples of new information or changes in facts and circumstances that might impact the level of a threat include:

● When the scope of a professional service is expanded.

● When the client becomes a listed entity or acquires another business unit.

● When the firm merges with another firm.

● When the professional accountant is jointly engaged by two clients and a dispute emerges between the two clients.

● When there is a change in the professional accountant’s personal or immediate family relationships.

Addressing Threats

300.8 A1 Paragraphs R120.10 to 120.10 A2 set out requirements and application material for addressing threats that are not at an acceptable level.

Examples of Safeguards

300.8 A2 Safeguards vary depending on the facts and circumstances. Examples of actions that in certain circumstances might be safeguards to address threats include:

● Assigning additional time and qualified personnel to required tasks when an engagement has been accepted might address a self-interest threat.

● Having an appropriate reviewer who was not a member of the team review the work performed or advise as necessary might address a self-review threat.

● Using different partners and engagement teams with separate reporting lines for the provision of non-assurance services to an assurance client might address self-review, advocacy or familiarity threats.

● Involving another firm to perform or re-perform part of the engagement might address self-interest, self-review, advocacy, familiarity or intimidation threats.

● Disclosing to clients any referral fees or commission arrangements received for recommending services or products might address a self-interest threat.

● Separating teams when dealing with matters of a confidential nature might address a self-interest threat.

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300.8 A3 The remaining sections of Part 3 and International Independence Standards describe certain threats that might arise during the course of performing professional services and include examples of actions that might address threats.

Appropriate Reviewer

300.8 A4 An appropriate reviewer is a professional with the necessary knowledge, skills, experience and authority to review, in an objective manner, the relevant work performed or service provided. Such an individual might be a professional accountant.

Communicating with Those Charged with Governance

R300.9 When communicating with those charged with governance in accordance with the Code, a professional accountant shall determine the appropriate individual(s) within the entity’s governance structure with whom to communicate. If the accountant communicates with a subgroup of those charged with governance, the accountant shall determine whether communication with all of those charged with governance is also necessary so that they are adequately informed.

300.9 A1 In determining with whom to communicate, a professional accountant might consider:

(a) The nature and importance of the circumstances; and

(b) The matter to be communicated.

300.9 A2 Examples of a subgroup of those charged with governance include an audit committee or an individual member of those charged with governance.

R300.10 If a professional accountant communicates with individuals who have management responsibilities as well as governance responsibilities, the accountant shall be satisfied that communication with those individuals adequately informs all of those in a governance role with whom the accountant would otherwise communicate.

300.10 A1 In some circumstances, all of those charged with governance are involved in managing the entity, for example, a small business where a single owner manages the entity and no one else has a governance role. In these cases, if matters are communicated to individual(s) with management responsibilities, and those individual(s) also have governance responsibilities, the professional accountant has satisfied the requirement to communicate with those charged with governance.

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SECTION 310

CONFLICTS OF INTEREST



310.2 A conflict of interest creates threats to compliance with the principle of objectivity and might create threats to compliance with the other fundamental principles. Such threats might be created when:

(a) A professional accountant provides a professional service related to a particular matter for two or more clients whose interests with respect to that matter are in conflict; or

(b) The interests of a professional accountant with respect to a particular matter and the interests of the client for whom the accountant provides a professional service related to that matter are in conflict.

310.3 This section sets out specific requirements and application material relevant to applying the conceptual framework to conflicts of interest. When a professional accountant provides an audit, review or other assurance service, independence is also required in accordance with International Independence Standards.


R310.4 A professional accountant shall not allow a conflict of interest to compromise professional or business judgment.

310.4 A1 Examples of circumstances that might create a conflict of interest include:

● Providing a transaction advisory service to a client seeking to acquire an audit client, where the firm has obtained confidential information during the course of the audit that might be relevant to the transaction.

● Providing advice to two clients at the same time where the clients are competing to acquire the same company and the advice might be relevant to the parties’ competitive positions.

● Providing services to a seller and a buyer in relation to the same transaction.

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● Preparing valuations of assets for two parties who are in an adversarial position with respect to the assets.

● Representing two clients in the same matter who are in a legal dispute with each other, such as during divorce proceedings, or the dissolution of a partnership.

● In relation to a license agreement, providing an assurance report for a licensor on the royalties due while advising the licensee on the amounts payable.

● Advising a client to invest in a business in which, for example, the spouse of the professional accountant has a financial interest.

● Providing strategic advice to a client on its competitive position while having a joint venture or similar interest with a major competitor of the client.

● Advising a client on acquiring a business which the firm is also interested in acquiring.

● Advising a client on buying a product or service while having a royalty or commission agreement with a potential seller of that product or service.

Conflict IdentificationGeneral

R310.5 Before accepting a new client relationship, engagement, or business relationship, a professional accountant shall take reasonable steps to identify circumstances that might create a conflict of interest, and therefore a threat to compliance with one or more of the fundamental principles. Such steps shall include identifying:

(a) The nature of the relevant interests and relationships between the parties involved; and

(b) The service and its implication for relevant parties.

310.5 A1 An effective conflict identification process assists a professional accountant when taking reasonable steps to identify interests and relationships that might create an actual or potential conflict of interest, both before determining whether to accept an engagement and throughout the engagement. Such a process includes considering matters identified by external parties, for example clients or potential clients. The earlier an actual or potential conflict of interest is identified, the greater the likelihood of the accountant being able to address threats created by the conflict of interest.

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310.5 A2 An effective process to identify actual or potential conflicts of interest will take into account factors such as:

● The nature of the professional services provided.

● The size of the firm.

● The size and nature of the client base.

● The structure of the firm, for example, the number and geographic location of offices.

310.5 A3 More information on client acceptance is set out in Section 320, Professional Appointments.

Changes in Circumstances

R310.6 A professional accountant shall remain alert to changes over time in the nature of services, interests and relationships that might create a conflict of interest while performing an engagement.

310.6 A1 The nature of services, interests and relationships might change during the engagement. This is particularly true when a professional accountant is asked to conduct an engagement in a situation that might become adversarial, even though the parties who engage the accountant initially might not be involved in a dispute.

Network Firms

R310.7 If the firm is a member of a network, a professional accountant shall consider conflicts of interest that the accountant has reason to believe might exist or arise due to interests and relationships of a network firm.

310.7 A1 Factors to consider when identifying interests and relationships involving a network firm include:

● The nature of the professional services provided.

● The clients served by the network.

● The geographic locations of all relevant parties.

Threats Created by Conflicts of Interest

310.8 A1 In general, the more direct the connection between the professional service and the matter on which the parties’ interests conflict, the more likely the level of the threat is not at an acceptable level.

310.8 A2 Factors that are relevant in evaluating the level of a threat created by a conflict of interest include measures that prevent unauthorized disclosure of confidential information when performing professional services related to a particular matter for two or more clients whose interests with respect to that matter are in conflict. These measures include:

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● The existence of separate practice areas for specialty functions within the firm, which might act as a barrier to the passing of confidential client information between practice areas.

● Policies and procedures to limit access to client files.

● Confidentiality agreements signed by personnel and partners of the firm.

● Separation of confidential information physically and electronically.

● Specific and dedicated training and communication.

310.8 A3 Examples of actions that might be safeguards to address threats created by a conflict of interest include:

● Having separate engagement teams who are provided with clear policies and procedures on maintaining confidentiality.

● Having an appropriate reviewer, who is not involved in providing the service or otherwise affected by the conflict, review the work performed to assess whether the key judgments and conclusions are appropriate.

Disclosure and Consent

General

R310.9 A professional accountant shall exercise professional judgment to determine whether the nature and significance of a conflict of interest are such that specific disclosure and explicit consent are necessary when addressing the threat created by the conflict of interest.

310.9 A1 Factors to consider when determining whether specific disclosure and explicit consent are necessary include:

● The circumstances creating the conflict of interest.

● The parties that might be affected.

● The nature of the issues that might arise.

● The potential for the particular matter to develop in an unexpected manner.

310.9 A2 Disclosure and consent might take different forms, for example:

● General disclosure to clients of circumstances where, as is common commercial practice, the professional accountant does not provide professional services exclusively to any one client (for example, in a particular professional service

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and market sector). This enables the client to provide general consent accordingly. For example, an accountant might make general disclosure in the standard terms and conditions for the engagement.

● Specific disclosure to affected clients of the circumstances of the particular conflict in sufficient detail to enable the client to make an informed decision about the matter and to provide explicit consent accordingly. Such disclosure might include a detailed presentation of the circumstances and a comprehensive explanation of any planned safeguards and the risks involved.

● Consent might be implied by clients’ conduct in circumstances where the professional accountant has sufficient evidence to conclude that clients know the circumstances at the outset and have accepted the conflict of interest if they do not raise an objection to the existence of the conflict.

310.9 A3 It is generally necessary:

(a) To disclose the nature of the conflict of interest and how any threats created were addressed to clients affected by a conflict of interest; and

(b) To obtain consent of the affected clients to perform the professional services when safeguards are applied to address the threat.

310.9 A4 If such disclosure or consent is not in writing, the professional accountant is encouraged to document:

(a) The nature of the circumstances giving rise to the conflict of interest;

(b) The safeguards applied to address the threats when applicable; and

(c) The consent obtained.

When Explicit Consent is Refused

R310.10 If a professional accountant has determined that explicit consent is necessary in accordance with paragraph R310.9 and the client has refused to provide consent, the accountant shall either:

(a) End or decline to perform professional services that would result in the conflict of interest; or

(b) End relevant relationships or dispose of relevant interests to eliminate the threat or reduce it to an acceptable level.

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Confidentiality

General

R310.11 A professional accountant shall remain alert to the principle of confidentiality, including when making disclosures or sharing information within the firm or network and seeking guidance from third parties.

310.11 A1 Subsection 114 sets out requirements and application material relevant to situations that might create a threat to compliance with the principle of confidentiality.

When Disclosure to Obtain Consent would Breach Confidentiality

R310.12 When making specific disclosure for the purpose of obtaining explicit consent would result in a breach of confidentiality, and such consent cannot therefore be obtained, the firm shall only accept or continue an engagement if:

(a) The firm does not act in an advocacy role for one client in an adversarial position against another client in the same matter;

(b) Specific measures are in place to prevent disclosure of confidential information between the engagement teams serving the two clients; and

(c) The firm is satisfied that a reasonable and informed third party would be likely to conclude that it is appropriate for the firm to accept or continue the engagement because a restriction on the firm’s ability to provide the professional service would produce a disproportionate adverse outcome for the clients or other relevant third parties.

310.12 A1 A breach of confidentiality might arise, for example, when seeking consent to perform:

● A transaction-related service for a client in a hostile takeover of another client of the firm.

● A forensic investigation for a client regarding a suspected fraud, where the firm has confidential information from its work for another client who might be involved in the fraud.

Documentation

R310.13 In the circumstances set out in paragraph R310.12, the professional accountant shall document:

(a) The nature of the circumstances, including the role that the accountant is to undertake;

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(b) The specific measures in place to prevent disclosure of information between the engagement teams serving the two clients; and

(c) Why it is appropriate to accept or continue the engagement.

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SECTION 320

PROFESSIONAL APPOINTMENTS



320.2 Acceptance of a new client relationship or changes in an existing engagement might create a threat to compliance with one or more of the fundamental principles. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application Material Client and Engagement Acceptance

General

320.3 A1 Threats to compliance with the principles of integrity or professional behavior might be created, for example, from questionable issues associated with the client (its owners, management or activities). Issues that, if known, might create such a threat include client involvement in illegal activities, dishonesty, questionable financial reporting practices or other unethical behavior.


● Knowledge and understanding of the client, its owners, management and those charged with governance and business activities.

● The client’s commitment to address the questionable issues, for example, through improving corporate governance practices or internal controls.

320.3 A3 A self-interest threat to compliance with the principle of professional competence and due care is created if the engagement team does not possess, or cannot acquire, the competencies to perform the professional services.


● An appropriate understanding of:

○ The nature of the client’s business;

○ The complexity of its operations;

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○ The requirements of the engagement; and

○ The purpose, nature and scope of the work to be performed.

● Knowledge of relevant industries or subject matter.

● Experience with relevant regulatory or reporting requirements.

● The existence of quality control policies and procedures designed to provide reasonable assurance that engagements are accepted only when they can be performed competently.

320.3 A5 Examples of actions that might be safeguards to address a self-interest threat include:

● Assigning sufficient engagement personnel with the necessary competencies.

● Agreeing on a realistic time frame for the performance of the engagement.

● Using experts where necessary.

Changes in a Professional Appointment

GeneralR320.4 A professional accountant shall determine whether there are any

reasons for not accepting an engagement when the accountant:

(a) Is asked by a potential client to replace another accountant;

(b) Considers tendering for an engagement held by another accountant; or

(c) Considers undertaking work that is complementary or additional to that of another accountant.

320.4 A1 There might be reasons for not accepting an engagement. One such reason might be if a threat created by the facts and circumstances cannot be addressed by applying safeguards. For example, there might be a self-interest threat to compliance with the principle of professional competence and due care if a professional accountant accepts the engagement before knowing all the relevant facts.

320.4 A2 If a professional accountant is asked to undertake work that is complementary or additional to the work of an existing or predecessor accountant, a self-interest threat to compliance with the principle of professional competence and due care might be created, for example, as a result of incomplete information.

320.4 A3 A factor that is relevant in evaluating the level of such a threat is whether tenders state that, before accepting the engagement, contact with the 117

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existing or predecessor accountant will be requested. This contact gives the proposed accountant the opportunity to inquire whether there are any reasons why the engagement should not be accepted.


● Asking the existing or predecessor accountant to provide any known information of which, in the existing or predecessor accountant’s opinion, the proposed accountant needs to be aware before deciding whether to accept the engagement. For example, inquiry might reveal previously undisclosed pertinent facts and might indicate disagreements with the existing or predecessor accountant that might influence the decision to accept the appointment.

● Obtaining information from other sources such as through inquiries of third parties or background investigations regarding senior management or those charged with governance of the client.

Communicating with the Existing or Predecessor Accountant

320.5 A1 A proposed accountant will usually need the client’s permission, preferably in writing, to initiate discussions with the existing or predecessor accountant.

R320.6 If unable to communicate with the existing or predecessor accountant, the proposed accountant shall take other reasonable steps to obtain information about any possible threats.

Communicating with the Proposed Accountant

R320.7 When an existing or predecessor accountant is asked to respond to a communication from a proposed accountant, the existing or predecessor accountant shall:

(a) Comply with relevant laws and regulations governing the request; and

(b) Provide any information honestly and unambiguously.

320.7 A1 An existing or predecessor accountant is bound by confidentiality. Whether the existing or predecessor accountant is permitted or required to discuss the affairs of a client with a proposed accountant will depend on the nature of the engagement and:

(a) Whether the existing or predecessor accountant has permission from the client for the discussion; and

(b) The legal and ethics requirements relating to such communications and disclosure, which might vary by jurisdiction. 118

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320.7 A2 Circumstances where a professional accountant is or might be required to disclose confidential information, or when disclosure might be appropriate, are set out in paragraph 114.1 A1 of the Code.

Changes in Audit or Review Appointments

R320.8 In the case of an audit or review of financial statements, a professional accountant shall request the existing or predecessor accountant to provide known information regarding any facts or other information of which, in the existing or predecessor accountant’s opinion, the proposed accountant needs to be aware before deciding whether to accept the engagement. Except for the circumstances involving non-compliance or suspected non-compliance with laws and regulations set out in paragraphs R360.21 and R360.22:

(a) If the client consents to the existing or predecessor accountant disclosing any such facts or other information, the existing or predecessor accountant shall provide the information honestly and unambiguously; and

(b) If the client fails or refuses to grant the existing or predecessor accountant permission to discuss the client’s affairs with the proposed accountant, the existing or predecessor accountant shall disclose this fact to the proposed accountant, who shall carefully consider such failure or refusal when determining whether to accept the appointment.

Client and Engagement Continuance

R320.9 For a recurring client engagement, a professional accountant shall periodically review whether to continue with the engagement.

320.9 A1 Potential threats to compliance with the fundamental principles might be created after acceptance which, had they been known earlier, would have caused the professional accountant to decline the engagement. For example, a self-interest threat to compliance with the principle of integrity might be created by improper earnings management or balance sheet valuations.

Using the Work of an Expert

R320.10 When a professional accountant intends to use the work of an expert, the accountant shall determine whether the use is warranted.

320.10 A1 Factors to consider when a professional accountant intends to use the work of an expert include the reputation and expertise of the expert, the resources available to the expert, and the professional and ethics standards applicable to the expert. This information might be gained from prior association with the expert or from consulting others.

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SECTION 321

SECOND OPINIONS



321.2 Providing a second opinion to an entity that is not an existing client might create a self-interest or other threat to compliance with one or more of the fundamental principles. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.


321.3 A1 A professional accountant might be asked to provide a second opinion on the application of accounting, auditing, reporting or other standards or principles to (a) specific circumstances, or (b) transactions by or on behalf of a company or an entity that is not an existing client. A threat, for example, a self-interest threat to compliance with the principle of professional competence and due care, might be created if the second opinion is not based on the same facts that the existing or predecessor accountant had, or is based on inadequate evidence.

321.3 A2 A factor that is relevant in evaluating the level of such a self-interest threat is the circumstances of the request and all the other available facts and assumptions relevant to the expression of a professional judgment.


● With the client’s permission, obtaining information from the existing or predecessor accountant.

● Describing the limitations surrounding any opinion in communications with the client.

● Providing the existing or predecessor accountant with a copy of the opinion.

When Permission to Communicate is Not Provided

R321.4 If an entity seeking a second opinion from a professional accountant will not permit the accountant to communicate with the existing or predecessor accountant, the accountant shall determine whether the accountant may provide the second opinion sought.120

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FEES AND OTHER TYPES OF REMUNERATION



330.2 The level and nature of fee and other remuneration arrangements might create a self-interest threat to compliance with one or more of the fundamental principles. This section sets out specific application material relevant to applying the conceptual framework in such circumstances.

Application Material Level of Fees

330.3 A1 The level of fees quoted might impact a professional accountant’s ability to perform professional services in accordance with professional standards.

330.3 A2 A professional accountant might quote whatever fee is considered appropriate. Quoting a fee lower than another accountant is not in itself unethical. However, the level of fees quoted creates a self-interest threat to compliance with the principle of professional competence and due care if the fee quoted is so low that it might be difficult to perform the engagement in accordance with applicable technical and professional standards.


● Whether the client is aware of the terms of the engagement and, in particular, the basis on which fees are charged and which professional services the quoted fee covers.

● Whether the level of the fee is set by an independent third party such as a regulatory body.


● Adjusting the level of fees or the scope of the engagement.

● Having an appropriate reviewer review the work performed.

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Contingent Fees

330.4 A1 Contingent fees are used for certain types of non-assurance services. However, contingent fees might create threats to compliance with the fundamental principles, particularly a self-interest threat to compliance with the principle of objectivity, in certain circumstances.

330.4 A2 Factors that are relevant in evaluating the level of such threats include:

● The nature of the engagement.

● The range of possible fee amounts.

● The basis for determining the fee.

● Disclosure to intended users of the work performed by the professional accountant and the basis of remuneration.

● Quality control policies and procedures.

● Whether an independent third party is to review the outcome or result of the transaction.

● Whether the level of the fee is set by an independent third party such as a regulatory body.


● Having an appropriate reviewer who was not involved in performing the non-assurance service review the work performed by the professional accountant.

● Obtaining an advance written agreement with the client on the basis of remuneration.

330.4 A4 Requirements and application material related to contingent fees for services provided to audit or review clients and other assurance clients are set out in International Independence Standards.

Referral Fees or Commissions

330.5 A1 A self-interest threat to compliance with the principles of objectivity and professional competence and due care is created if a professional accountant pays or receives a referral fee or receives a commission relating to a client. Such referral fees or commissions include, for example:

● A fee paid to another professional accountant for the purposes of obtaining new client work when the client continues as a client of the existing accountant but requires specialist services not offered by that accountant.

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● A fee received for referring a continuing client to another professional accountant or other expert where the existing accountant does not provide the specific professional service required by the client.

● A commission received from a third party (for example, a software vendor) in connection with the sale of goods or services to a client.


● Obtaining an advance agreement from the client for commission arrangements in connection with the sale by another party of goods or services to the client might address a self-interest threat.

● Disclosing to clients any referral fees or commission arrangements paid to, or received from, another professional accountant or third party for recommending services or products might address a self-interest threat.

Purchase or Sale of a Firm

330.6 A1 A professional accountant may purchase all or part of another firm on the basis that payments will be made to individuals formerly owning the firm or to their heirs or estates. Such payments are not referral fees or commissions for the purposes of this section.

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SECTION 340

INDUCEMENTS, INCLUDING GIFTS AND HOSPITALITY



340.2 Offering or accepting inducements might create a self-interest, familiarity or intimidation threat to compliance with the fundamental principles, particularly the principles of integrity, objectivity and professional behavior.

340.3 This section sets out requirements and application material relevant to applying the conceptual framework in relation to the offering and accepting of inducements when performing professional services that does not constitute non-compliance with laws and regulations. This section also requires a professional accountant to comply with relevant laws and regulations when offering or accepting inducements.


340.4 A1 An inducement is an object, situation, or action that is used as a means to influence another individual’s behavior, but not necessarily with the intent to improperly influence that individual’s behavior. Inducements can range from minor acts of hospitality between professional accountants and existing or prospective clients to acts that result in non-compliance with laws and regulations. An inducement can take many different forms, for example:

● Gifts.

● Hospitality.

● Entertainment.

● Political or charitable donations.

● Appeals to friendship and loyalty.

● Employment or other commercial opportunities.

● Preferential treatment, rights or privileges.

Inducements Prohibited by Laws and Regulations

R340.5 In many jurisdictions, there are laws and regulations, such as those related to bribery and corruption, that prohibit the offering or accepting

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of inducements in certain circumstances. The professional accountant shall obtain an understanding of relevant laws and regulations and comply with them when the accountant encounters such circumstances.

Inducements Not Prohibited by Laws and Regulations

340.6 A1 The offering or accepting of inducements that is not prohibited by laws and regulations might still create threats to compliance with the fundamental principles.

Inducements with Intent to Improperly Influence Behavior

R340.7 A professional accountant shall not offer, or encourage others to offer, any inducement that is made, or which the accountant considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behavior of the recipient or of another individual.

R340.8 A professional accountant shall not accept, or encourage others to accept, any inducement that the accountant concludes is made, or considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behavior of the recipient or of another individual.

340.9 A1 An inducement is considered as improperly influencing an individual’s behavior if it causes the individual to act in an unethical manner. Such improper influence can be directed either towards the recipient or towards another individual who has some relationship with the recipient. The fundamental principles are an appropriate frame of reference for a professional accountant in considering what constitutes unethical behavior on the part of the accountant and, if necessary by analogy, other individuals.

340.9 A2 A breach of the fundamental principle of integrity arises when a professional accountant offers or accepts, or encourages others to offer or accept, an inducement where the intent is to improperly influence the behavior of the recipient or of another individual.

340.9 A3 The determination of whether there is actual or perceived intent to improperly influence behavior requires the exercise of professional judgment. Relevant factors to consider might include:

● The nature, frequency, value and cumulative effect of the inducement.

● Timing of when the inducement is offered relative to any action or decision that it might influence.

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● Whether the inducement is a customary or cultural practice in the circumstances, for example, offering a gift on the occasion of a religious holiday or wedding.

● Whether the inducement is an ancillary part of a professional service, for example, offering or accepting lunch in connection with a business meeting.

● Whether the offer of the inducement is limited to an individual recipient or available to a broader group. The broader group might be internal or external to the firm, such as other suppliers to the client.

● The roles and positions of the individuals at the firm or the client offering or being offered the inducement.

● Whether the professional accountant knows, or has reason to believe, that accepting the inducement would breach the policies and procedures of the client.

● The degree of transparency with which the inducement is offered.

● Whether the inducement was required or requested by the recipient.

● The known previous behavior or reputation of the offeror.

Consideration of Further Actions

340.10 A1 If the professional accountant becomes aware of an inducement offered with actual or perceived intent to improperly influence behavior, threats to compliance with the fundamental principles might still be created even if the requirements in paragraphs R340.7 and R340.8 are met.


● Informing senior management of the firm or those charged with governance of the client regarding the offer.

● Amending or terminating the business relationship with the client.

Inducements with No Intent to Improperly Influence Behavior

340.11 A1 The requirements and application material set out in the conceptual framework apply when a professional accountant has concluded there is no actual or perceived intent to improperly influence the behavior of the recipient or of another individual.

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340.11 A2 If such an inducement is trivial and inconsequential, any threats created will be at an acceptable level.

340.11 A3 Examples of circumstances where offering or accepting such an inducement might create threats even if the professional accountant has concluded there is no actual or perceived intent to improperly influence behavior include:

● Self-interest threats

○ A professional accountant is offered hospitality from the prospective acquirer of a client while providing corporate finance services to the client.

● Familiarity threats

○ A professional accountant regularly takes an existing or prospective client to sporting events.

● Intimidation threats

○ A professional accountant accepts hospitality from a client, the nature of which could be perceived to be inappropriate were it to be publicly disclosed.

340.11 A4 Relevant factors in evaluating the level of such threats created by offering or accepting such an inducement include the same factors set out in paragraph 340.9 A3 for determining intent.

340.11 A5 Examples of actions that might eliminate threats created by offering or accepting such an inducement include:

● Declining or not offering the inducement.

● Transferring responsibility for the provision of any professional services to the client to another individual who the professional accountant has no reason to believe would be, or would be perceived to be, improperly influenced when providing the services.

340.11 A6 Examples of actions that might be safeguards to address such threats created by offering or accepting such an inducement include:

● Being transparent with senior management of the firm or of the client about offering or accepting an inducement.

● Registering the inducement in a log monitored by senior management of the firm or another individual responsible for the firm’s ethics compliance or maintained by the client.

● Having an appropriate reviewer, who is not otherwise involved in providing the professional service, review any work

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performed or decisions made by the professional accountant with respect to the client from which the accountant accepted the inducement.

● Donating the inducement to charity after receipt and appropriately disclosing the donation, for example, to a member of senior management of the firm or the individual who offered the inducement.

● Reimbursing the cost of the inducement, such as hospitality, received.

● As soon as possible, returning the inducement, such as a gift, after it was initially accepted.

Immediate or Close Family Members

R340.12 A professional accountant shall remain alert to potential threats to the accountant’s compliance with the fundamental principles created by the offering of an inducement:

(a) By an immediate or close family member of the accountant to an existing or prospective client of the accountant.

(b) To an immediate or close family member of the accountant by an existing or prospective client of the accountant.

R340.13 Where the professional accountant becomes aware of an inducement being offered to or made by an immediate or close family member and concludes there is intent to improperly influence the behavior of the accountant or of an existing or prospective client of the accountant, or considers a reasonable and informed third party would be likely to conclude such intent exists, the accountant shall advise the immediate or close family member not to offer or accept the inducement.

340.13 A1 The factors set out in paragraph 340.9 A3 are relevant in determining whether there is actual or perceived intent to improperly influence the behavior of the professional accountant or of the existing or prospective client. Another factor that is relevant is the nature or closeness of the relationship, between:

(a) The accountant and the immediate or close family member;

(b) The immediate or close family member and the existing or prospective client; and

(c) The accountant and the existing or prospective client.

For example, the offer of employment, outside of the normal recruitment process, to the spouse of the accountant by a client for whom the

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accountant is providing a business valuation for a prospective sale might indicate such intent.

340.13 A2 The application material in paragraph 340.10 A2 is also relevant in addressing threats that might be created when there is actual or perceived intent to improperly influence the behavior of the professional accountant, or of the existing or prospective client even if the immediate or close family member has followed the advice given pursuant to paragraph R340.13.

Application of the Conceptual Framework

340.14 A1 Where the professional accountant becomes aware of an inducement offered in the circumstances addressed in paragraph R340.12, threats to compliance with the fundamental principles might be created where:

(a) The immediate or close family member offers or accepts the inducement contrary to the advice of the accountant pursuant to paragraph R340.13; or

(b) The accountant does not have reason to believe an actual or perceived intent to improperly influence the behavior of the accountant or of the existing or prospective client exists.

340.14 A2 The application material in paragraphs 340.11 A1 to 340.11 A6 is relevant for the purposes of identifying, evaluating and addressing such threats. Factors that are relevant in evaluating the level of threats in these circumstances also include the nature or closeness of the relationships set out in paragraph 340.13 A1.


340.15 A1 If a professional accountant encounters or is made aware of inducements that might result in non-compliance or suspected non-compliance with laws and regulations by a client or individuals working for or under the direction of the client, the requirements and application material in Section 360 apply.

340.15 A2 If a firm, network firm or an audit team member is being offered gifts or hospitality from an audit client, the requirement and application material set out in Section 420 apply.

340.15 A3 If a firm or an assurance team member is being offered gifts or hospitality from an assurance client, the requirement and application material set out in Section 906 apply.

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SECTION 350

CUSTODY OF CLIENT ASSETS



350.2 Holding client assets creates a self-interest or other threat to compliance with the principles of professional behavior and objectivity. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application Material Before Taking Custody

R350.3 A professional accountant shall not assume custody of client money or other assets unless permitted to do so by law and in accordance with any conditions under which such custody may be taken.

R350.4 As part of client and engagement acceptance procedures related to assuming custody of client money or assets, a professional accountant shall:

(a) Make inquiries about the source of the assets; and

(b) Consider related legal and regulatory obligations.

350.4 A1 Inquiries about the source of client assets might reveal, for example, that the assets were derived from illegal activities, such as money laundering. In such circumstances, a threat would be created and the provisions of Section 360 would apply.

After Taking Custody

R350.5 A professional accountant entrusted with money or other assets belonging to others shall:

(a) Comply with the laws and regulations relevant to holding and accounting for the assets;

(b) Keep the assets separately from personal or firm assets;

(c) Use the assets only for the purpose for which they are intended; and

(d) Be ready at all times to account for the assets and any income, dividends, or gains generated, to any individuals entitled to that accounting.

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SECTION 360

RESPONDING TO NON-COMPLIANCE WITH LAWS AND REGULATIONS



360.2 A self-interest or intimidation threat to compliance with the principles of integrity and professional behavior is created when a professional accountant becomes aware of non-compliance or suspected non-compliance with laws and regulations.

360.3 A professional accountant might encounter or be made aware of non-compliance or suspected non-compliance in the course of providing a professional service to a client. This section guides the accountant in assessing the implications of the matter and the possible courses of action when responding to non-compliance or suspected non-compliance with:

(a) Laws and regulations generally recognized to have a direct effect on the determination of material amounts and disclosures in the client’s financial statements; and

(b) Other laws and regulations that do not have a direct effect on the determination of the amounts and disclosures in the client’s financial statements, but compliance with which might be fundamental to the operating aspects of the client’s business, to its ability to continue its business, or to avoid material penalties.

Objectives of the Professional Accountant in Relation to Non-compliance with Laws and Regulations

360.4 A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. When responding to non-compliance or suspected non-compliance, the objectives of the professional accountant are:

(a) To comply with the principles of integrity and professional behavior;

(b) By alerting management or, where appropriate, those charged with governance of the client, to seek to:

(i) Enable them to rectify, remediate or mitigate the consequences of the identified or suspected non-compliance; or131

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(ii) Deter the commission of the non-compliance where it has not yet occurred; and

(c) To take such further action as appropriate in the public interest.


360.5 A1 Non-compliance with laws and regulations (“non-compliance”) comprises acts of omission or commission, intentional or unintentional, which are contrary to the prevailing laws or regulations committed by the following parties:

(a) A client;

(b) Those charged with governance of a client;

(c) Management of a client; or

(d) Other individuals working for or under the direction of a client.

360.5 A2 Examples of laws and regulations which this section addresses include those that deal with:

● Fraud, corruption and bribery.

● Money laundering, terrorist financing and proceeds of crime.

● Securities markets and trading.

● Banking and other financial products and services.

● Data protection.

● Tax and pension liabilities and payments.

● Environmental protection.

● Public health and safety.

360.5 A3 Non-compliance might result in fines, litigation or other consequences for the client, potentially materially affecting its financial statements. Importantly, such non-compliance might have wider public interest implications in terms of potentially substantial harm to investors, creditors, employees or the general public. For the purposes of this section, an act that causes substantial harm is one that results in serious adverse consequences to any of these parties in financial or non-financial terms. Examples include the perpetration of a fraud resulting in significant financial losses to investors, and breaches of environmental laws and regulations endangering the health or safety of employees or the public.

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R360.6 In some jurisdictions, there are legal or regulatory provisions governing how professional accountants should address non-compliance or suspected non-compliance. These legal or regulatory provisions might differ from or go beyond the provisions in this section. When encountering such non-compliance or suspected non-compliance, the accountant shall obtain an understanding of those legal or regulatory provisions and comply with them, including:

(a) Any requirement to report the matter to an appropriate authority; and

(b) Any prohibition on alerting the client.

360.6 A1 A prohibition on alerting the client might arise, for example, pursuant to anti-money laundering legislation.

360.7 A1 This section applies regardless of the nature of the client, including whether or not it is a public interest entity.

360.7 A2 A professional accountant who encounters or is made aware of matters that are clearly inconsequential is not required to comply with this section. Whether a matter is clearly inconsequential is to be judged with respect to its nature and its impact, financial or otherwise, on the client, its stakeholders and the general public.

360.7 A3 This section does not address:

(a) Personal misconduct unrelated to the business activities of the client; and

(b) Non-compliance by parties other than those specified in paragraph 360.5 A1. This includes, for example, circumstances where a professional accountant has been engaged by a client to perform a due diligence assignment on a third party entity and the identified or suspected non-compliance has been committed by that third-party.

The accountant might nevertheless find the guidance in this section helpful in considering how to respond in these situations.

Responsibilities of Management and Those Charged with Governance

360.8 A1 Management, with the oversight of those charged with governance, is responsible for ensuring that the client’s business activities are conducted in accordance with laws and regulations. Management and those charged with governance are also responsible for identifying and addressing any non-compliance by:

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(c) A member of management; or

(d) Other individuals working for or under the direction of the client.

Responsibilities of All Professional Accountants

R360.9 Where a professional accountant becomes aware of a matter to which this section applies, the steps that the accountant takes to comply with this section shall be taken on a timely basis. In taking timely steps, the accountant shall have regard to the nature of the matter and the potential harm to the interests of the entity, investors, creditors, employees or the general public.

Audits of Financial Statements

Obtaining an Understanding of the Matter

R360.10 If a professional accountant engaged to perform an audit of financial statements becomes aware of information concerning non-compliance or suspected non-compliance, the accountant shall obtain an understanding of the matter. This understanding shall include the nature of the non-compliance or suspected non-compliance and the circumstances in which it has occurred or might occur.

360.10 A1 The professional accountant might become aware of the non-compliance or suspected non-compliance in the course of performing the engagement or through information provided by other parties.

360.10 A2 The professional accountant is expected to apply knowledge and expertise, and exercise professional judgment. However, the accountant is not expected to have a level of knowledge of laws and regulations greater than that which is required to undertake the engagement. Whether an act constitutes non-compliance is ultimately a matter to be determined by a court or other appropriate adjudicative body.

360.10 A3 Depending on the nature and significance of the matter, the professional accountant might consult on a confidential basis with others within the firm, a network firm or a professional body, or with legal counsel.

R360.11 If the professional accountant identifies or suspects that non-compliance has occurred or might occur, the accountant shall discuss the matter with the appropriate level of management and, where appropriate, those charged with governance.

360.11 A1 The purpose of the discussion is to clarify the professional accountant’s understanding of the facts and circumstances relevant to the matter and its potential consequences. The discussion also might prompt management or those charged with governance to investigate the matter.

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360.11 A2 The appropriate level of management with whom to discuss the matter is a question of professional judgment. Relevant factors to consider include:

● The nature and circumstances of the matter.

● The individuals actually or potentially involved.

● The likelihood of collusion.

● The potential consequences of the matter.

● Whether that level of management is able to investigate the matter and take appropriate action.

360.11 A3 The appropriate level of management is usually at least one level above the individual or individuals involved or potentially involved in the matter. In the context of a group, the appropriate level might be management at an entity that controls the client.

360.11 A4 The professional accountant might also consider discussing the matter with internal auditors, where applicable.

R360.12 If the professional accountant believes that management is involved in the non-compliance or suspected non-compliance, the accountant shall discuss the matter with those charged with governance.

Addressing the Matter

R360.13 In discussing the non-compliance or suspected non-compliance with management and, where appropriate, those charged with governance, the professional accountant shall advise them to take appropriate and timely actions, if they have not already done so, to:

(a) Rectify, remediate or mitigate the consequences of the non-compliance;

(b) Deter the commission of the non-compliance where it has not yet occurred; or

(c) Disclose the matter to an appropriate authority where required by law or regulation or where considered necessary in the public interest.

R360.14 The professional accountant shall consider whether management and those charged with governance understand their legal or regulatory responsibilities with respect to the non-compliance or suspected non-compliance.

360.14 A1 If management and those charged with governance do not understand their legal or regulatory responsibilities with respect to the matter,

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the professional accountant might suggest appropriate sources of information or recommend that they obtain legal advice.

R360.15 The professional accountant shall comply with applicable:

(a) Laws and regulations, including legal or regulatory provisions governing the reporting of non-compliance or suspected non-compliance to an appropriate authority; and

(b) Requirements under auditing standards, including those relating to:

● Identifying and responding to non-compliance, including fraud.

● Communicating with those charged with governance.

● Considering the implications of the non-compliance or suspected non-compliance for the auditor’s report.

360.15 A1 Some laws and regulations might stipulate a period within which reports of non-compliance or suspected non-compliance are to be made to an appropriate authority.

Communication with Respect to Groups

R360.16 Where a professional accountant becomes aware of non-compliance or suspected non-compliance in relation to a component of a group in either of the following two situations, the accountant shall communicate the matter to the group engagement partner unless prohibited from doing so by law or regulation:

(a) The accountant is, for purposes of an audit of the group financial statements, requested by the group engagement team to perform work on financial information related to the component; or

(b) The accountant is engaged to perform an audit of the component’s financial statements for purposes other than the group audit, for example, a statutory audit.

The communication to the group engagement partner shall be in addition to responding to the matter in accordance with the provisions of this section.

360.16 A1 The purpose of the communication is to enable the group engagement partner to be informed about the matter and to determine, in the context of the group audit, whether and, if so, how to address it in accordance with the provisions in this section. The communication requirement in paragraph R360.16 applies regardless of whether the group engagement partner’s firm or network is the same as or different from the professional accountant’s firm or network.

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R360.17 Where the group engagement partner becomes aware of non-compliance or suspected non-compliance in the course of an audit of group financial statements, the group engagement partner shall consider whether the matter might be relevant to one or more components:

(a) Whose financial information is subject to work for purposes of the audit of the group financial statements; or

(b) Whose financial statements are subject to audit for purposes other than the group audit, for example, a statutory audit.

This consideration shall be in addition to responding to the matter in the context of the group audit in accordance with the provisions of this section.

R360.18 If the non-compliance or suspected non-compliance might be relevant to one or more of the components specified in paragraph R360.17(a) and (b), the group engagement partner shall take steps to have the matter communicated to those performing work at the components, unless prohibited from doing so by law or regulation. If necessary, the group engagement partner shall arrange for appropriate inquiries to be made (either of management or from publicly available information) as to whether the relevant component(s) specified in paragraph R360.17(b) is subject to audit and, if so, to ascertain to the extent practicable the identity of the auditor.

360.18 A1 The purpose of the communication is to enable those responsible for work at the components to be informed about the matter and to determine whether and, if so, how to address it in accordance with the provisions in this section. The communication requirement applies regardless of whether the group engagement partner’s firm or network is the same as or different from the firms or networks of those performing work at the components.

Determining Whether Further Action Is Needed

R360.19 The professional accountant shall assess the appropriateness of the response of management and, where applicable, those charged with governance.

360.19 A1 Relevant factors to consider in assessing the appropriateness of the response of management and, where applicable, those charged with governance include whether:

● The response is timely.

● The non-compliance or suspected non-compliance has been adequately investigated.

● Action has been, or is being, taken to rectify, remediate or mitigate the consequences of any non-compliance.137

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● Action has been, or is being, taken to deter the commission of any non-compliance where it has not yet occurred.

● Appropriate steps have been, or are being, taken to reduce the risk of re-occurrence, for example, additional controls or training.

● The non-compliance or suspected non-compliance has been disclosed to an appropriate authority where appropriate and, if so, whether the disclosure appears adequate.

R360.20 In light of the response of management and, where applicable, those charged with governance, the professional accountant shall determine if further action is needed in the public interest.

360.20 A1 The determination of whether further action is needed, and the nature and extent of it, will depend on various factors, including:



● The pervasiveness of the matter throughout the client.

● Whether the professional accountant continues to have confidence in the integrity of management and, where applicable, those charged with governance.

● Whether the non-compliance or suspected non-compliance is likely to recur.

● Whether there is credible evidence of actual or potential substantial harm to the interests of the entity, investors, creditors, employees or the general public.

360.20 A2 Examples of circumstances that might cause the professional accountant no longer to have confidence in the integrity of management and, where applicable, those charged with governance include situations where:

● The accountant suspects or has evidence of their involvement or intended involvement in any non-compliance.

● The accountant is aware that they have knowledge of such non-compliance and, contrary to legal or regulatory requirements, have not reported, or authorized the reporting of, the matter to an appropriate authority within a reasonable period.

R360.21 The professional accountant shall exercise professional judgment in determining the need for, and nature and extent of, further action. In making this determination, the accountant shall take into account whether a reasonable and informed third party would be likely to conclude that the accountant has acted appropriately in the public interest. 138

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360.21 A1 Further action that the professional accountant might take includes:


● Withdrawing from the engagement and the professional relationship where permitted by law or regulation.

360.21 A2 Withdrawing from the engagement and the professional relationship is not a substitute for taking other actions that might be needed to achieve the professional accountant’s objectives under this section. In some jurisdictions, however, there might be limitations as to the further actions available to the accountant. In such circumstances, withdrawal might be the only available course of action.

R360.22 Where the professional accountant has withdrawn from the professional relationship pursuant to paragraphs R360.20 and 360.21 A1, the accountant shall, on request by the proposed accountant pursuant to paragraph R320.8, provide all relevant facts and other information concerning the identified or suspected non-compliance to the proposed accountant. The predecessor accountant shall do so, even in the circumstances addressed in paragraph R320.8(b) where the client fails or refuses to grant the predecessor accountant permission to discuss the client’s affairs with the proposed accountant, unless prohibited by law or regulation.

360.22 A1 The facts and other information to be provided are those that, in the predecessor accountant’s opinion, the proposed accountant needs to be aware of before deciding whether to accept the audit appointment. Section 320 addresses communications from proposed accountants.

R360.23 If the proposed accountant is unable to communicate with the predecessor accountant, the proposed accountant shall take reasonable steps to obtain information about the circumstances of the change of appointment by other means.

360.23 A1 Other means to obtain information about the circumstances of the change of appointment include inquiries of third parties or background investigations of management or those charged with governance.

360.24 A1 As assessment of the matter might involve complex analysis and judgments, the professional accountant might consider:


● Obtaining legal advice to understand the accountant’s options and the professional or legal implications of taking any particular course of action.

● Consulting on a confidential basis with a regulatory or professional body. 139

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Determining Whether to Disclose the Matter to an Appropriate Authority

360.25 A1 Disclosure of the matter to an appropriate authority would be precluded if doing so would be contrary to law or regulation. Otherwise, the purpose of making disclosure is to enable an appropriate authority to cause the matter to be investigated and action to be taken in the public interest.

360.25 A2 The determination of whether to make such a disclosure depends in particular on the nature and extent of the actual or potential harm that is or might be caused by the matter to investors, creditors, employees or the general public. For example, the professional accountant might determine that disclosure of the matter to an appropriate authority is an appropriate course of action if:

● The entity is engaged in bribery (for example, of local or foreign government officials for purposes of securing large contracts).

● The entity is regulated and the matter is of such significance as to threaten its license to operate.

● The entity is listed on a securities exchange and the matter might result in adverse consequences to the fair and orderly market in the entity’s securities or pose a systemic risk to the financial markets.

● It is likely that the entity would sell products that are harmful to public health or safety.

● The entity is promoting a scheme to its clients to assist them in evading taxes.

360.25 A3 The determination of whether to make such a disclosure will also depend on external factors such as:

● Whether there is an appropriate authority that is able to receive the information, and cause the matter to be investigated and action to be taken. The appropriate authority will depend on the nature of the matter. For example, the appropriate authority would be a securities regulator in the case of fraudulent financial reporting or an environmental protection agency in the case of a breach of environmental laws and regulations.

● Whether there exists robust and credible protection from civil, criminal or professional liability or retaliation afforded by legislation or regulation, such as under whistle-blowing legislation or regulation.

● Whether there are actual or potential threats to the physical safety of the professional accountant or other individuals.

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R360.26 If the professional accountant determines that disclosure of the non-compliance or suspected non-compliance to an appropriate authority is an appropriate course of action in the circumstances, that disclosure is permitted pursuant to paragraph R114.1(d) of the Code. When making such disclosure, the accountant shall act in good faith and exercise caution when making statements and assertions. The accountant shall also consider whether it is appropriate to inform the client of the accountant’s intentions before disclosing the matter.

Imminent Breach

R360.27 In exceptional circumstances, the professional accountant might become aware of actual or intended conduct that the accountant has reason to believe would constitute an imminent breach of a law or regulation that would cause substantial harm to investors, creditors, employees or the general public. Having first considered whether it would be appropriate to discuss the matter with management or those charged with governance of the entity, the accountant shall exercise professional judgment and determine whether to disclose the matter immediately to an appropriate authority in order to prevent or mitigate the consequences of such imminent breach. If disclosure is made, that disclosure is permitted pursuant to paragraph R114.1(d) of the Code.

Documentation

R360.28 In relation to non-compliance or suspected non-compliance that falls within the scope of this section, the professional accountant shall document:

● How management and, where applicable, those charged with governance have responded to the matter.

● The courses of action the accountant considered, the judgments made and the decisions that were taken, having regard to the reasonable and informed third party test.


360.28 A1 This documentation is in addition to complying with the documentation requirements under applicable auditing standards. ISAs, for example, require a professional accountant performing an audit of financial statements to:

● Prepare documentation sufficient to enable an understanding of significant matters arising during the audit, the conclusions reached, and significant professional judgments made in reaching those conclusions;

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● Document discussions of significant matters with management, those charged with governance, and others, including the nature of the significant matters discussed and when and with whom the discussions took place; and

● Document identified or suspected non-compliance, and the results of discussion with management and, where applicable, those charged with governance and other parties outside the entity.

Professional Services Other than Audits of Financial Statements

Obtaining an Understanding of the Matter and Addressing It with Management and Those Charged with Governance

R360.29 If a professional accountant engaged to provide a professional service other than an audit of financial statements becomes aware of information concerning non-compliance or suspected non-compliance, the accountant shall seek to obtain an understanding of the matter. This understanding shall include the nature of the non-compliance or suspected non-compliance and the circumstances in which it has occurred or might be about to occur.

360.29 A1 The professional accountant is expected to apply knowledge and expertise, and exercise professional judgment. However, the accountant is not expected to have a level of understanding of laws and regulations beyond that which is required for the professional service for which the accountant was engaged. Whether an act constitutes actual non-compliance is ultimately a matter to be determined by a court or other appropriate adjudicative body.

360.29 A2 Depending on the nature and significance of the matter, the professional accountant might consult on a confidential basis with others within the firm, a network firm or a professional body, or with legal counsel.

R360.30 If the professional accountant identifies or suspects that non-compliance has occurred or might occur, the accountant shall discuss the matter with the appropriate level of management. If the accountant has access to those charged with governance, the accountant shall also discuss the matter with them where appropriate.

360.30 A1 The purpose of the discussion is to clarify the professional accountant’s understanding of the facts and circumstances relevant to the matter and its potential consequences. The discussion also might prompt management or those charged with governance to investigate the matter.

360.30 A2 The appropriate level of management with whom to discuss the matter is a question of professional judgment. Relevant factors to consider include:

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● The nature and circumstances of the matter.

● The individuals actually or potentially involved.

● The likelihood of collusion.

● The potential consequences of the matter.

● Whether that level of management is able to investigate the matter and take appropriate action.

Communicating the Matter to the Entity’s External Auditor

R360.31 If the professional accountant is performing a non-audit service for:

(a) An audit client of the firm; or

(b) A component of an audit client of the firm,

the accountant shall communicate the non-compliance or suspected non-compliance within the firm, unless prohibited from doing so by law or regulation. The communication shall be made in accordance with the firm’s protocols or procedures. In the absence of such protocols and procedures, it shall be made directly to the audit engagement partner.

R360.32 If the professional accountant is performing a non-audit service for:

(a) An audit client of a network firm; or

(b) A component of an audit client of a network firm,

the accountant shall consider whether to communicate the non-compliance or suspected non-compliance to the network firm. Where the communication is made, it shall be made in accordance with the network’s protocols or procedures. In the absence of such protocols and procedures, it shall be made directly to the audit engagement partner.

R360.33 If the professional accountant is performing a non-audit service for a client that is not:

(a) An audit client of the firm or a network firm; or

(b) A component of an audit client of the firm or a network firm,

the accountant shall consider whether to communicate the non-compliance or suspected non-compliance to the firm that is the client’s external auditor, if any.

Relevant Factors to Consider

360.34 A1 Factors relevant to considering the communication in accordance with paragraphs R360.31 to R360.33 include:

● Whether doing so would be contrary to law or regulation.143

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● Whether there are restrictions about disclosure imposed by a regulatory agency or prosecutor in an ongoing investigation into the non-compliance or suspected non-compliance.

● Whether the purpose of the engagement is to investigate potential non-compliance within the entity to enable it to take appropriate action.

● Whether management or those charged with governance have already informed the entity’s external auditor about the matter.

● The likely materiality of the matter to the audit of the client’s financial statements or, where the matter relates to a component of a group, its likely materiality to the audit of the group financial statements.

Purpose of Communication

360.35 A1 In the circumstances addressed in paragraphs R360.31 to R360.33, the purpose of the communication is to enable the audit engagement partner to be informed about the non-compliance or suspected non-compliance and to determine whether and, if so, how to address it in accordance with the provisions of this section.

Considering Whether Further Action Is Needed

R360.36 The professional accountant shall also consider whether further action is needed in the public interest.

360.36 A1 Whether further action is needed, and the nature and extent of it, will depend on factors such as:


● The appropriateness and timeliness of the response of management and, where applicable, those charged with governance.


● The involvement of management or those charged with governance in the matter.

● The likelihood of substantial harm to the interests of the client, investors, creditors, employees or the general public.

360.36 A2 Further action by the professional accountant might include:


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● Withdrawing from the engagement and the professional relationship where permitted by law or regulation.

360.36 A3 In considering whether to disclose to an appropriate authority, relevant factors to take into account include:

● Whether doing so would be contrary to law or regulation.

● Whether there are restrictions about disclosure imposed by a regulatory agency or prosecutor in an ongoing investigation into the non-compliance or suspected non-compliance.

● Whether the purpose of the engagement is to investigate potential non-compliance within the entity to enable it to take appropriate action.

R360.37 If the professional accountant determines that disclosure of the non-compliance or suspected non-compliance to an appropriate authority is an appropriate course of action in the circumstances, that disclosure is permitted pursuant to paragraph R114.1(d) of the Code. When making such disclosure, the accountant shall act in good faith and exercise caution when making statements and assertions. The accountant shall also consider whether it is appropriate to inform the client of the accountant’s intentions before disclosing the matter.

Imminent Breach

R360.38 In exceptional circumstances, the professional accountant might become aware of actual or intended conduct that the accountant has reason to believe would constitute an imminent breach of a law or regulation that would cause substantial harm to investors, creditors, employees or the general public. Having first considered whether it would be appropriate to discuss the matter with management or those charged with governance of the entity, the accountant shall exercise professional judgment and determine whether to disclose the matter immediately to an appropriate authority in order to prevent or mitigate the consequences of such imminent breach of law or regulation. If disclosure is made, that disclosure is permitted pursuant to paragraph R114.1(d) of the Code.

Seeking Advice

360.39 A1 The professional accountant might consider:


● Obtaining legal advice to understand the professional or legal implications of taking any particular course of action.

● Consulting on a confidential basis with a regulatory or professional body. 145

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Documentation

360.40 A1 In relation to non-compliance or suspected non-compliance that falls within the scope of this section, the professional accountant is encouraged to document:

● The matter.

● The results of discussion with management and, where applicable, those charged with governance and other parties.

● How management and, where applicable, those charged with governance have responded to the matter.



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Section 400 Applying the Conceptual Framework to Independence for Audit and Review Engagements .............................................. 118

Section 410 Fees .......................................................................................... 132

Section 411 Compensation and Evaluation Policies ..................................... 136

Section 420 Gifts and Hospitality ................................................................. 137

Section 430 Actual or Threatened Litigation ................................................ 138

Section 510 Financial Interests ..................................................................... 139

Section 511 Loans and Guarantees ............................................................... 144

Section 520 Business Relationships.............................................................. 146

Section 521 Family and Personal Relationships ........................................... 148

Section 522 Recent Service with an Audit Client ......................................... 151

Section 523 Serving as a Director or Officer of an Audit Client .................. 153

Section 524 Employment With an Audit Client ............................................ 154

Section 525 Temporary Personnel Assignments ........................................... 158

Section 540 Long Association of Personnel (Including Partner Rotation) with an Audit Client .................................................................. 159

Section 600 Provision of Non-assurance Services to an Audit Client .......... 165

Subsection 601 – Accounting and Bookkeeping Services ..................... 170

Subsection 602 – Administrative Services ............................................ 173

Subsection 603 – Valuation Services ..................................................... 173

Subsection 604 – Tax Services .............................................................. 175

Subsection 605 – Internal Audit Services............................................... 181

Subsection 606 – Information Technology Systems Services ................ 184

Subsection 607 – Litigation Support Services ....................................... 186

Subsection 608 – Legal Services ........................................................... 187

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Subsection 609 – Recruiting Services .................................................... 189

Subsection 610 – Corporate Finance Services ...................................... 191

Section 800 Reports on Special Purpose Financial Statements that Include a Restriction on Use and Distribution (Audit And Review Engagements) .............................................................. 193

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INTERNATIONAL INDEPENDENCE STANDARDS (PARTS 4A AND 4B)

PART 4A – INDEPENDENCE FOR AUDIT AND REVIEW ENGAGEMENTS

SECTION 400

APPLYING THE CONCEPTUAL FRAMEWORK TO INDEPENDENCE FOR AUDIT AND REVIEW ENGAGEMENTS

IntroductionGeneral

400.1 It is in the public interest and required by the Code that professional accountants in public practice be independent when performing audit or review engagements.

400.2 This Part applies to both audit and review engagements. The terms “audit,” “audit team,” “audit engagement,” “audit client,” and “audit report” apply equally to review, review team, review engagement, review client, and review engagement report.


400.4 ISQC 1 requires a firm to establish policies and procedures designed to provide it with reasonable assurance that the firm, its personnel and, where applicable, others subject to independence requirements (including network firm personnel), maintain independence where required by relevant ethics requirements. ISAs and ISREs establish responsibilities for engagement partners and engagement teams at the level of the engagement for audits and reviews, respectively. The allocation of responsibilities within a firm will depend on its size, structure and organization. Many of the provisions of this Part do not prescribe the specific responsibility of individuals within the firm for actions related to independence, instead referring to “firm” for ease of reference. Firms assign responsibility for a particular action to an individual or a group of individuals (such as an audit team), in accordance with ISQC 1. In addition, an individual professional accountant remains responsible for compliance with any provisions that apply to that accountant’s activities, interests or relationships.

400.5 Independence is linked to the principles of objectivity and integrity. It comprises:

(a) Independence of mind – the state of mind that permits the expression of a conclusion without being affected by influences 149

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that compromise professional judgment, thereby allowing an individual to act with integrity, and exercise objectivity and professional skepticism.

(b) Independence in appearance – the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude that a firm’s, or an audit team member’s, integrity, objectivity or professional skepticism has been compromised.

In this Part, references to an individual or firm being “independent” mean that the individual or firm has complied with the provisions of this Part.

400.6 When performing audit engagements, the Code requires firms to comply with the fundamental principles and be independent. This Part sets out specific requirements and application material on how to apply the conceptual framework to maintain independence when performing such engagements. The conceptual framework set out in Section 120 applies to independence as it does to the fundamental principles set out in Section 110.

400.7 This Part describes:

(a) Facts and circumstances, including professional activities, interests and relationships, that create or might create threats to independence;

(b) Potential actions, including safeguards, that might be appropriate to address any such threats; and

(c) Some situations where the threats cannot be eliminated or there can be no safeguards to reduce them to an acceptable level.

Public Interest Entities

400.8 Some of the requirements and application material set out in this Part reflect the extent of public interest in certain entities which are defined to be public interest entities. Firms are encouraged to determine whether to treat additional entities, or certain categories of entities, as public interest entities because they have a large number and wide range of stakeholders. Factors to be considered include:

● The nature of the business, such as the holding of assets in a fiduciary capacity for a large number of stakeholders. Examples might include financial institutions, such as banks and insurance companies, and pension funds.

● Size.

● Number of employees.150

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Reports that Include a Restriction on Use and Distribution

400.9 An audit report might include a restriction on use and distribution. If it does and the conditions set out in Section 800 are met, then the independence requirements in this Part may be modified as provided in Section 800.

Assurance Engagements other than Audit and Review Engagements

400.10 Independence standards for assurance engagements that are not audit or review engagements are set out in Part 4B – Independence for Assurance Engagements Other than Audit and Review Engagements.


R400.11 A firm performing an audit engagement shall be independent.

R400.12 A firm shall apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to independence in relation to an audit engagement.

[Paragraphs 400.13 to 400.19 are intentionally left blank]

Related Entities

R400.20 As defined, an audit client that is a listed entity includes all of its related entities. For all other entities, references to an audit client in this Part include related entities over which the client has direct or indirect control. When the audit team knows, or has reason to believe, that a relationship or circumstance involving any other related entity of the client is relevant to the evaluation of the firm’s independence from the client, the audit team shall include that related entity when identifying, evaluating and addressing threats to independence.


Period During which Independence is Required

R400.30 Independence, as required by this Part, shall be maintained during both:

(a) The engagement period; and

(b) The period covered by the financial statements.

400.30 A1 The engagement period starts when the audit team begins to perform the audit. The engagement period ends when the audit report is issued. When the engagement is of a recurring nature, it ends at the later of the notification by either party that the professional relationship has ended or the issuance of the final audit report.

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R400.31 If an entity becomes an audit client during or after the period covered by the financial statements on which the firm will express an opinion, the firm shall determine whether any threats to independence are created by:

(a) Financial or business relationships with the audit client during or after the period covered by the financial statements but before accepting the audit engagement; or

(b) Previous services provided to the audit client by the firm or a network firm.

400.31 A1 Threats to independence are created if a non-assurance service was provided to an audit client during, or after the period covered by the financial statements, but before the audit team begins to perform the audit, and the service would not be permitted during the engagement period.


● Using professionals who are not audit team members to perform the service.

● Having an appropriate reviewer review the audit and non-assurance work as appropriate.

● Engaging another firm outside of the network to evaluate the results of the non-assurance service or having another firm outside of the network re-perform the non-assurance service to the extent necessary to enable the other firm to take responsibility for the service.


Communication with those Charged with Governance

400.40 A1 Paragraphs R300.9 and R300.10 set out requirements with respect to communicating with those charged with governance.

400.40 A2 Even when not required by the Code, applicable professional standards, laws or regulations, regular communication is encouraged between a firm and those charged with governance of the client regarding relationships and other matters that might, in the firm’s opinion, reasonably bear on independence. Such communication enables those charged with governance to:

(a) Consider the firm’s judgments in identifying and evaluating threats;

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(b) Consider how threats have been addressed including the appropriateness of safeguards when they are available and capable of being applied; and

(c) Take appropriate action.

Such an approach can be particularly helpful with respect to intimidation and familiarity threats.


Network Firms

400.50 A1 Firms frequently form larger structures with other firms and entities to enhance their ability to provide professional services. Whether these larger structures create a network depends on the particular facts and circumstances. It does not depend on whether the firms and entities are legally separate and distinct.

R400.51 A network firm shall be independent of the audit clients of the other firms within the network as required by this Part.

400.51 A1 The independence requirements in this Part that apply to a network firm apply to any entity that meets the definition of a network firm. It is not necessary for the entity also to meet the definition of a firm. For example, a consulting practice or professional law practice might be a network firm but not a firm.

R400.52 When associated with a larger structure of other firms and entities, a firm shall:

(a) Exercise professional judgment to determine whether a network is created by such a larger structure;

(b) Consider whether a reasonable and informed third party would be likely to conclude that the other firms and entities in the larger structure are associated in such a way that a network exists; and

(c) Apply such judgment consistently throughout such a larger structure.

R400.53 When determining whether a network is created by a larger structure of firms and other entities, a firm shall conclude that a network exists when such a larger structure is aimed at co-operation and:

(a) It is clearly aimed at profit or cost sharing among the entities within the structure. (Ref: Para. 400.53 A2);

(b) The entities within the structure share common ownership, control or management. (Ref: Para. 400.53 A3);

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(c) The entities within the structure share common quality control policies and procedures. (Ref: Para. 400.53 A4);

(d) The entities within the structure share a common business strategy. (Ref: Para. 400.53 A5);

(e) The entities within the structure share the use of a common brand name. (Ref: Para. 400.53 A6, 400.53 A7); or

(f) The entities within the structure share a significant part of professional resources. (Ref: Para 400.53 A8, 400.53 A9).

400.53 A1 There might be other arrangements between firms and entities within a larger structure that constitute a network, in addition to those arrangements described in paragraph R400.53. However, a larger structure might be aimed only at facilitating the referral of work, which in itself does not meet the criteria necessary to constitute a network.

400.53 A2 The sharing of immaterial costs does not in itself create a network. In addition, if the sharing of costs is limited only to those costs related to the development of audit methodologies, manuals or training courses, this would not in itself create a network. Further, an association between a firm and an otherwise unrelated entity jointly to provide a service or develop a product does not in itself create a network. (Ref: Para. R400.53(a)).

400.53 A3 Common ownership, control or management might be achieved by contract or other means. (Ref: Para. R400.53(b)).

400.53 A4 Common quality control policies and procedures are those designed, implemented and monitored across the larger structure. (Ref: Para. R400.53(c)).

400.53 A5 Sharing a common business strategy involves an agreement by the entities to achieve common strategic objectives. An entity is not a network firm merely because it co-operates with another entity solely to respond jointly to a request for a proposal for the provision of a professional service. (Ref: Para. R400.53(d)).

400.53 A6 A common brand name includes common initials or a common name. A firm is using a common brand name if it includes, for example, the common brand name as part of, or along with, its firm name when a partner of the firm signs an audit report. (Ref: Para. R400.53(e)).

400.53 A7 Even if a firm does not belong to a network and does not use a common brand name as part of its firm name, it might appear to belong to a network if its stationery or promotional materials refer to the firm being a member of an association of firms. Accordingly, if care is not taken in how a firm describes such membership, a perception might be created that the firm belongs to a network. (Ref: Para. R400.53(e)).154

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400.53 A8 Professional resources include:

● Common systems that enable firms to exchange information such as client data, billing and time records.

● Partners and other personnel.

● Technical departments that consult on technical or industry specific issues, transactions or events for assurance engagements.

● Audit methodology or audit manuals.

● Training courses and facilities. (Ref: Para. R400.53(f)).

400.53 A9 Whether the shared professional resources are significant depends on the circumstances. For example:

● The shared resources might be limited to common audit methodology or audit manuals, with no exchange of personnel or client or market information. In such circumstances, it is unlikely that the shared resources would be significant. The same applies to a common training endeavor.

● The shared resources might involve the exchange of personnel or information, such as where personnel are drawn from a shared pool, or where a common technical department is created within the larger structure to provide participating firms with technical advice that the firms are required to follow. In such circumstances, a reasonable and informed third party is more likely to conclude that the shared resources are significant. (Ref: Para. R400.53(f)).

R400.54 If a firm or a network sells a component of its practice, and the component continues to use all or part of the firm’s or network’s name for a limited time, the relevant entities shall determine how to disclose that they are not network firms when presenting themselves to outside parties.

400.54 A1 The agreement for the sale of a component of a practice might provide that, for a limited period of time, the sold component can continue to use all or part of the name of the firm or the network, even though it is no longer connected to the firm or the network. In such circumstances, while the two entities might be practicing under a common name, the facts are such that they do not belong to a larger structure aimed at cooperation. The two entities are therefore not network firms.


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General Documentation of Independence for Audit and Review Engagements

R400.60 A firm shall document conclusions regarding compliance with this Part, and the substance of any relevant discussions that support those conclusions. In particular:

(a) When safeguards are applied to address a threat, the firm shall document the nature of the threat and the safeguards in place or applied; and

(b) When a threat required significant analysis and the firm concluded that the threat was already at an acceptable level, the firm shall document the nature of the threat and the rationale for the conclusion.

400.60 A1 Documentation provides evidence of the firm’s judgments in forming conclusions regarding compliance with this Part. However, a lack of documentation does not determine whether a firm considered a particular matter or whether the firm is independent.


Mergers and Acquisitions

When a Client Merger Creates a Threat

400.70 A1 An entity might become a related entity of an audit client because of a merger or acquisition. A threat to independence and, therefore, to the ability of a firm to continue an audit engagement might be created by previous or current interests or relationships between a firm or network firm and such a related entity.

R400.71 In the circumstances set out in paragraph 400.70 A1,

(a) The firm shall identify and evaluate previous and current interests and relationships with the related entity that, taking into account any actions taken to address the threat, might affect its independence and therefore its ability to continue the audit engagement after the effective date of the merger or acquisition; and

(b) Subject to paragraph R400.72, the firm shall take steps to end any interests or relationships that are not permitted by the Code by the effective date of the merger or acquisition.

R400.72 As an exception to paragraph R400.71(b), if the interest or relationship cannot reasonably be ended by the effective date of the merger or acquisition, the firm shall:

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(a) Evaluate the threat that is created by the interest or relationship; and

(b) Discuss with those charged with governance the reasons why the interest or relationship cannot reasonably be ended by the effective date and the evaluation of the level of the threat.

400.72 A1 In some circumstances, it might not be reasonably possible to end an interest or relationship creating a threat by the effective date of the merger or acquisition. This might be because the firm provides a non-assurance service to the related entity, which the entity is not able to transition in an orderly manner to another provider by that date.

400.72 A2 Factors that are relevant in evaluating the level of a threat created by mergers and acquisitions when there are interests and relationships that cannot reasonably be ended include:

● The nature and significance of the interest or relationship.

● The nature and significance of the related entity relationship (for example, whether the related entity is a subsidiary or parent).

● The length of time until the interest or relationship can reasonably be ended.

R400.73 If, following the discussion set out in paragraph R400.72(b), those charged with governance request the firm to continue as the auditor, the firm shall do so only if:

(a) The interest or relationship will be ended as soon as reasonably possible but no later than six months after the effective date of the merger or acquisition;

(b) Any individual who has such an interest or relationship, including one that has arisen through performing a non-assurance service that would not be permitted by Section 600 and its subsections, will not be a member of the engagement team for the audit or the individual responsible for the engagement quality control review; and

(c) Transitional measures will be applied, as necessary, and discussed with those charged with governance.

400.73 A1 Examples of such transitional measures include:

● Having a professional accountant review the audit or non-assurance work as appropriate.

● Having a professional accountant, who is not a member of the firm expressing the opinion on the financial statements, perform a review that is equivalent to an engagement quality control review.

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● Engaging another firm to evaluate the results of the non-assurance service or having another firm re-perform the non-assurance service to the extent necessary to enable the other firm to take responsibility for the service.

R400.74 The firm might have completed a significant amount of work on the audit prior to the effective date of the merger or acquisition and might be able to complete the remaining audit procedures within a short period of time. In such circumstances, if those charged with governance request the firm to complete the audit while continuing with an interest or relationship identified in paragraph 400.70 A1, the firm shall only do so if it:

(a) Has evaluated the level of the threat and discussed the results with those charged with governance;

(b) Complies with the requirements of paragraph R400.73(a) to (c); and

(c) Ceases to be the auditor no later than the date that the audit report is issued.

If Objectivity Remains Compromised

R400.75 Even if all the requirements of paragraphs R400.71 to R400.74 could be met, the firm shall determine whether the circumstances identified in paragraph 400.70 A1 create a threat that cannot be addressed such that objectivity would be compromised. If so, the firm shall cease to be the auditor.

Documentation

R400.76 The firm shall document:

(a) Any interests or relationships identified in paragraph 400.70 A1 that will not be ended by the effective date of the merger or acquisition and the reasons why they will not be ended;

(b) The transitional measures applied;

(c) The results of the discussion with those charged with governance; and

(d) The reasons why the previous and current interests and relationships do not create a threat such that objectivity would be compromised.

[Paragraphs 400.77 to 400.79 are intentionally left blank.]

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SECTION 400

Breach of an Independence Provision for Audit and Review Engagements

When a Firm Identifies a Breach

R400.80 If a firm concludes that a breach of a requirement in this Part has occurred, the firm shall:

(a) End, suspend or eliminate the interest or relationship that created the breach and address the consequences of the breach;

(b) Consider whether any legal or regulatory requirements apply to the breach and, if so:

(i) Comply with those requirements; and

(ii) Consider reporting the breach to a professional or regulatory body or oversight authority if such reporting is common practice or expected in the relevant jurisdiction;

(c) Promptly communicate the breach in accordance with its policies and procedures to:

(i) The engagement partner;

(ii) Those with responsibility for the policies and procedures relating to independence;

(iii) Other relevant personnel in the firm and, where appropriate, the network; and

(iv) Those subject to the independence requirements in Part 4A who need to take appropriate action;

(d) Evaluate the significance of the breach and its impact on the firm’s objectivity and ability to issue an audit report; and

(e) Depending on the significance of the breach, determine:

(i) Whether to end the audit engagement; or

(ii) Whether it is possible to take action that satisfactorily addresses the consequences of the breach and whether such action can be taken and is appropriate in the circumstances.

In making this determination, the firm shall exercise professional judgment and take into account whether a reasonable and informed third party would be likely to conclude that the firm’s objectivity would be compromised, and therefore, the firm would be unable to issue an audit report.

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400.80 A1 A breach of a provision of this Part might occur despite the firm having policies and procedures designed to provide it with reasonable assurance that independence is maintained. It might be necessary to end the audit engagement because of the breach.

400.80 A2 The significance and impact of a breach on the firm’s objectivity and ability to issue an audit report will depend on factors such as:

● The nature and duration of the breach.

● The number and nature of any previous breaches with respect to the current audit engagement.

● Whether an audit team member had knowledge of the interest or relationship that created the breach.

● Whether the individual who created the breach is an audit team member or another individual for whom there are independence requirements.

● If the breach relates to an audit team member, the role of that individual.

● If the breach was created by providing a professional service, the impact of that service, if any, on the accounting records or the amounts recorded in the financial statements on which the firm will express an opinion.

● The extent of the self-interest, advocacy, intimidation or other threats created by the breach.

400.80 A3 Depending upon the significance of the breach, examples of actions that the firm might consider to address the breach satisfactorily include:

● Removing the relevant individual from the audit team.

● Using different individuals to conduct an additional review of the affected audit work or to re-perform that work to the extent necessary.

● Recommending that the audit client engage another firm to review or re-perform the affected audit work to the extent necessary.

● If the breach relates to a non-assurance service that affects the accounting records or an amount recorded in the financial statements, engaging another firm to evaluate the results of the non-assurance service or having another firm re-perform the non-assurance service to the extent necessary to enable the other firm to take responsibility for the service.

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R400.81 If the firm determines that action cannot be taken to address the consequences of the breach satisfactorily, the firm shall inform those charged with governance as soon as possible and take the steps necessary to end the audit engagement in compliance with any applicable legal or regulatory requirements. Where ending the engagement is not permitted by laws or regulations, the firm shall comply with any reporting or disclosure requirements.

R400.82 If the firm determines that action can be taken to address the consequences of the breach satisfactorily, the firm shall discuss with those charged with governance:

(a) The significance of the breach, including its nature and duration;

(b) How the breach occurred and how it was identified;

(c) The action proposed or taken and why the action will satisfactorily address the consequences of the breach and enable the firm to issue an audit report;

(d) The conclusion that, in the firm’s professional judgment, objectivity has not been compromised and the rationale for that conclusion; and

(e) Any steps proposed or taken by the firm to reduce or avoid the risk of further breaches occurring.

Such discussion shall take place as soon as possible unless an alternative timing is specified by those charged with governance for reporting less significant breaches.

Communication of Breaches to Those Charged with Governance

400.83 A1 Paragraphs R300.9 and R300.10 set out requirements with respect to communicating with those charged with governance.

R400.84 With respect to breaches, the firm shall communicate in writing to those charged with governance:

(a) All matters discussed in accordance with paragraph R400.82 and obtain the concurrence of those charged with governance that action can be, or has been, taken to satisfactorily address the consequences of the breach; and

(b) A description of:

(i) The firm’s policies and procedures relevant to the breach designed to provide it with reasonable assurance that independence is maintained; and

(ii) Any steps that the firm has taken, or proposes to take, to reduce or avoid the risk of further breaches occurring. 161

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R400.85 If those charged with governance do not concur that the action proposed by the firm in accordance with paragraph R400.80(e)(ii) satisfactorily addresses the consequences of the breach, the firm shall take the steps necessary to end the audit engagement in accordance with paragraph R400.81.

Breaches Before the Previous Audit Report Was Issued

R400.86 If the breach occurred prior to the issuance of the previous audit report, the firm shall comply with the provisions of Part 4A in evaluating the significance of the breach and its impact on the firm’s objectivity and its ability to issue an audit report in the current period.

R400.87 The firm shall also:

(a) Consider the impact of the breach, if any, on the firm’s objectivity in relation to any previously issued audit reports, and the possibility of withdrawing such audit reports; and

(b) Discuss the matter with those charged with governance.

Documentation

R400.88 In complying with the requirements in paragraphs R400.80 to R400.87, the firm shall document:

(a) The breach;

(b) The actions taken;

(c) The key decisions made;

(d) All the matters discussed with those charged with governance; and

(e) Any discussions with a professional or regulatory body or oversight authority.

R400.89 If the firm continues with the audit engagement, it shall document:

(a) The conclusion that, in the firm’s professional judgment, objectivity has not been compromised; and

(b) The rationale for why the action taken satisfactorily addressed the consequences of the breach so that the firm could issue an audit report.

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SECTION 410

FEES

Introduction410.1 Firms are required to comply with the fundamental principles, be

independent and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to independence.

410.2 The nature and level of fees or other types of remuneration might create a self-interest or intimidation threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application MaterialFees – Relative Size

All Audit Clients

410.3 A1 When the total fees generated from an audit client by the firm expressing the audit opinion represent a large proportion of the total fees of that firm, the dependence on that client and concern about losing the client create a self-interest or intimidation threat.


● The operating structure of the firm.

● Whether the firm is well established or new.

● The significance of the client qualitatively and/or quantitatively to the firm.

410.3 A3 An example of an action that might be a safeguard to address such a self-interest or intimidation threat is increasing the client base in the firm to reduce dependence on the audit client.

410.3 A4 A self-interest or intimidation threat is also created when the fees generated by a firm from an audit client represent a large proportion of the revenue of one partner or one office of the firm.


● The significance of the client qualitatively and/or quantitatively to the partner or office.

● The extent to which the compensation of the partner, or the partners in the office, is dependent upon the fees generated from the client.

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410.3 A6 Examples of actions that might be safeguards to address such self-interest or intimidation threats include:

● Increasing the client base of the partner or the office to reduce dependence on the audit client.

● Having an appropriate reviewer who did not take part in the audit engagement review the work.

Audit Clients that are Public Interest Entities

R410.4 Where an audit client is a public interest entity and, for two consecutive years, the total fees from the client and its related entities represent more than 15% of the total fees received by the firm expressing the opinion on the financial statements of the client, the firm shall:

(a) Disclose to those charged with governance of the audit client the fact that the total of such fees represents more than 15% of the total fees received by the firm; and

(b) Discuss whether either of the following actions might be a safeguard to address the threat created by the total fees received by the firm from the client, and if so, apply it:

(i) Prior to the audit opinion being issued on the second year’s financial statements, a professional accountant, who is not a member of the firm expressing the opinion on the financial statements, performs an engagement quality control review of that engagement; or a professional body performs a review of that engagement that is equivalent to an engagement quality control review (“a pre-issuance review”); or

(ii) After the audit opinion on the second year’s financial statements has been issued, and before the audit opinion being issued on the third year’s financial statements, a professional accountant, who is not a member of the firm expressing the opinion on the financial statements, or a professional body performs a review of the second year’s audit that is equivalent to an engagement quality control review (“a post-issuance review”).

R410.5 When the total fees described in paragraph R410.4 significantly exceed 15%, the firm shall determine whether the level of the threat is such that a post-issuance review would not reduce the threat to an acceptable level. If so, the firm shall have a pre-issuance review performed.

R410.6 If the fees described in paragraph R410.4 continue to exceed 15%, the firm shall each year:

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(a) Disclose to and discuss with those charged with governance the matters set out in paragraph R410.4; and

(b) Comply with paragraphs R410.4(b) and R410.5.

Fees – Overdue

410.7 A1 A self-interest threat might be created if a significant part of fees is not paid before the audit report for the following year is issued. It is generally expected that the firm will require payment of such fees before such audit report is issued. The requirements and application material set out in Section 511 with respect to loans and guarantees might also apply to situations where such unpaid fees exist.


● Obtaining partial payment of overdue fees.

● Having an appropriate reviewer who did not take part in the audit engagement review the work performed.

R410.8 When a significant part of fees due from an audit client remains unpaid for a long time, the firm shall determine:

(a) Whether the overdue fees might be equivalent to a loan to the client; and

(b) Whether it is appropriate for the firm to be re-appointed or continue the audit engagement.

Contingent Fees

410.9 A1 Contingent fees are fees calculated on a predetermined basis relating to the outcome of a transaction or the result of the services performed. A contingent fee charged through an intermediary is an example of an indirect contingent fee. In this section, a fee is not regarded as being contingent if established by a court or other public authority.

R410.10 A firm shall not charge directly or indirectly a contingent fee for an audit engagement.

R410.11 A firm or network firm shall not charge directly or indirectly a contingent fee for a non-assurance service provided to an audit client, if:

(a) The fee is charged by the firm expressing the opinion on the financial statements and the fee is material or expected to be material to that firm;

(b) The fee is charged by a network firm that participates in a significant part of the audit and the fee is material or expected to be material to that firm; or

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(c) The outcome of the non-assurance service, and therefore the amount of the fee, is dependent on a future or contemporary judgment related to the audit of a material amount in the financial statements.

410.12 A1 Paragraphs R410.10 and R410.11 preclude a firm or a network firm from entering into certain contingent fee arrangements with an audit client. Even if a contingent fee arrangement is not precluded when providing a non-assurance service to an audit client, a self-interest threat might still be created.



● Whether an appropriate authority determines the outcome on which the contingent fee depends.

● Disclosure to intended users of the work performed by the firm and the basis of remuneration.

● The nature of the service.

● The effect of the event or transaction on the financial statements.


● Having an appropriate reviewer who was not involved in performing the non-assurance service review the work performed by the firm.


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SECTION 411

SECTION 411

COMPENSATION AND EVALUATION POLICIES

Introduction 411.1 Firms are required to comply with the fundamental principles, be


411.2 A firm’s evaluation or compensation policies might create a self-interest threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.


411.3 A1 When an audit team member for a particular audit client is evaluated on or compensated for selling non-assurance services to that audit client, the level of the self-interest threat will depend on:

(a) What proportion of the compensation or evaluation is based on the sale of such services;

(b) The role of the individual on the audit team; and

(c) Whether the sale of such non-assurance services influences promotion decisions.

411.3 A2 Examples of actions that might eliminate such a self-interest threat include:

● Revising the compensation plan or evaluation process for that individual.

● Removing that individual from the audit team.

411.3 A3 An example of an action that might be a safeguard to address such a self-interest threat is having an appropriate reviewer review the work of the audit team member.

R411.4 A firm shall not evaluate or compensate a key audit partner based on that partner’s success in selling non-assurance services to the partner’s audit client. This requirement does not preclude normal profit-sharing arrangements between partners of a firm.

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SECTION 420

GIFTS AND HOSPITALITY



420.2 Accepting gifts and hospitality from an audit client might create a self-interest, familiarity or intimidation threat. This section sets out a specific requirement and application material relevant to applying the conceptual framework in such circumstances.

Requirement and Application MaterialR420.3 A firm, network firm or an audit team member shall not accept gifts

and hospitality from an audit client, unless the value is trivial and inconsequential.

420.3 A1 Where a firm, network firm or audit team member is offering or accepting an inducement to or from an audit client, the requirements and application material set out in Section 340 apply and non-compliance with these requirements might create threats to independence.

420.3 A2 The requirements set out in Section 340 relating to offering or accepting inducements do not allow a firm, network firm or audit team member to accept gifts and hospitality where the intent is to improperly influence behavior even if the value is trivial and inconsequential.

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SECTION 430

SECTION 430

ACTUAL OR THREATENED LITIGATION



430.2 When litigation with an audit client occurs, or appears likely, self-interest and intimidation threats are created. This section sets out specific application material relevant to applying the conceptual framework in such circumstances.

Application MaterialGeneral

430.3 A1 The relationship between client management and audit team members must be characterized by complete candor and full disclosure regarding all aspects of a client’s operations. Adversarial positions might result from actual or threatened litigation between an audit client and the firm, a network firm or an audit team member. Such adversarial positions might affect management’s willingness to make complete disclosures and create self-interest and intimidation threats.


● The materiality of the litigation.

● Whether the litigation relates to a prior audit engagement.

430.3 A3 If the litigation involves an audit team member, an example of an action that might eliminate such self-interest and intimidation threats is removing that individual from the audit team.

430.3 A4 An example of an action that might be a safeguard to address such self-interest and intimidation threats is to have an appropriate reviewer review the work performed.

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SECTION 510

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SECTION 510

FINANCIAL INTERESTS



510.2 Holding a financial interest in an audit client might create a self-interest threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.


510.3 A1 A financial interest might be held directly or indirectly through an intermediary such as a collective investment vehicle, an estate or a trust. When a beneficial owner has control over the intermediary or ability to influence its investment decisions, the Code defines that financial interest to be direct. Conversely, when a beneficial owner has no control over the intermediary or ability to influence its investment decisions, the Code defines that financial interest to be indirect.

510.3 A2 This section contains references to the “materiality” of a financial interest. In determining whether such an interest is material to an individual, the combined net worth of the individual and the individual’s immediate family members may be taken into account.

510.3 A3 Factors that are relevant in evaluating the level of a self-interest threat created by holding a financial interest in an audit client include:

● The role of the individual holding the financial interest.

● Whether the financial interest is direct or indirect.

● The materiality of the financial interest.

Financial Interests Held by the Firm, a Network Firm, Audit Team Members and Others

R510.4 Subject to paragraph R510.5, a direct financial interest or a material indirect financial interest in the audit client shall not be held by:

(a) The firm or a network firm;

(b) An audit team member, or any of that individual’s immediate family;

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(c) Any other partner in the office in which an engagement partner practices in connection with the audit engagement, or any of that other partner’s immediate family; or

(d) Any other partner or managerial employee who provides non-audit services to the audit client, except for any whose involvement is minimal, or any of that individual’s immediate family.

510.4 A1 The office in which the engagement partner practices in connection with an audit engagement is not necessarily the office to which that partner is assigned. When the engagement partner is located in a different office from that of the other audit team members, professional judgment is needed to determine the office in which the partner practices in connection with the engagement.

R510.5 As an exception to paragraph R510.4, an immediate family member identified in subparagraphs R510.4(c) or (d) may hold a direct or material indirect financial interest in an audit client, provided that:

(a) The family member received the financial interest because of employment rights, for example through pension or share option plans, and, when necessary, the firm addresses the threat created by the financial interest; and

(b) The family member disposes of or forfeits the financial interest as soon as practicable when the family member has or obtains the right to do so, or in the case of a stock option, when the family member obtains the right to exercise the option.

Financial Interests in an Entity Controlling an Audit Client

R510.6 When an entity has a controlling interest in an audit client and the client is material to the entity, neither the firm, nor a network firm, nor an audit team member, nor any of that individual’s immediate family shall hold a direct or material indirect financial interest in that entity.

Financial Interests Held as Trustee

R510.7 Paragraph R510.4 shall also apply to a financial interest in an audit client held in a trust for which the firm, network firm or individual acts as trustee, unless:

(a) None of the following is a beneficiary of the trust: the trustee, the audit team member or any of that individual’s immediate family, the firm or a network firm;

(b) The interest in the audit client held by the trust is not material to the trust;

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(c) The trust is not able to exercise significant influence over the audit client; and

(d) None of the following can significantly influence any investment decision involving a financial interest in the audit client: the trustee, the audit team member or any of that individual’s immediate family, the firm or a network firm.

Financial Interests in Common with the Audit Client

R510.8 (a) A firm, or a network firm, or an audit team member, or any of that individual’s immediate fam ily shall not hold a financial interest in an entity when an audit client also has a financial interest in that entity, unless:

(i) The financial interests are immaterial to the firm, the network firm, the audit team member and that individual’s immediate family member and the audit client, as applicable; or

(ii) The audit client cannot exercise significant influence over the entity.

(b) Before an individual who has a financial interest described in paragraph R510.8(a) can become an audit team member, the individual or that individual’s immediate family member shall either:

(i) Dispose of the interest; or

(ii) Dispose of enough of the interest so that the remaining interest is no longer material.

Financial Interests Received Unintentionally

R510.9 If a firm, a network firm or a partner or employee of the firm or a network firm, or any of that individual’s immediate family, receives a direct financial interest or a material indirect financial interest in an audit client by way of an inheritance, gift, as a result of a merger or in similar circumstances and the interest would not otherwise be permitted to be held under this section, then:

(a) If the interest is received by the firm or a network firm, or an audit team member or any of that individual’s immediate family, the financial interest shall be disposed of immediately, or enough of an indirect financial interest shall be disposed of so that the remaining interest is no longer material; or

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of as soon as possible, or enough of an indirect financial interest shall be disposed of so that the remaining interest is no longer material; and

(ii) Pending the disposal of the financial interest, when necessary the firm shall address the threat created.

Financial Interests – Other Circumstances

Immediate Family

510.10 A1 A self-interest, familiarity, or intimidation threat might be created if an audit team member, or any of that individual’s immediate family, or the firm or a network firm has a financial interest in an entity when a director or officer or controlling owner of the audit client is also known to have a financial interest in that entity.


● The role of the individual on the audit team.

● Whether ownership of the entity is closely or widely held.

● Whether the interest allows the investor to control or significantly influence the entity.


510.10 A3 An example of an action that might eliminate such a self-interest, familiarity, or intimidation threat is removing the audit team member with the financial interest from the audit team.


Close Family

510.10 A5 A self-interest threat might be created if an audit team member knows that a close family member has a direct financial interest or a material indirect financial interest in the audit client.


● The nature of the relationship between the audit team member and the close family member.


● The materiality of the financial interest to the close family member.

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● Having the close family member dispose, as soon as practicable, of all of the financial interest or dispose of enough of an indirect financial interest so that the remaining interest is no longer material.

● Removing the individual from the audit team.


Other Individuals

510.10 A9 A self-interest threat might be created if an audit team member knows that a financial interest in the audit client is held by individuals such as:

● Partners and professional employees of the firm or network firm, apart from those who are specifically not permitted to hold such financial interests by paragraph R510.4, or their immediate family members.

● Individuals with a close personal relationship with an audit team member.


● The firm’s organizational, operating and reporting structure.

● The nature of the relationship between the individual and the audit team member.

510.10 A11 An example of an action that might eliminate such a self-interest threat is removing the audit team member with the personal relationship from the audit team.


● Excluding the audit team member from any significant decision-making concerning the audit engagement.

● Having an appropriate reviewer review the work of the audit team member.

Retirement Benefit Plan of a Firm or Network Firm

510.10 A13 A self-interest threat might be created if a retirement benefit plan of a firm or a network firm holds a direct or material indirect financial interest in an audit client.

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SECTION 511

SECTION 511

LOANS AND GUARANTEES



511.2 A loan or a guarantee of a loan with an audit client might create a self-interest threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.


511.3 A1 This section contains references to the “materiality” of a loan or guarantee. In determining whether such a loan or guarantee is material to an individual, the combined net worth of the individual and the individual’s immediate family members may be taken into account.

Loans and Guarantees with an Audit Client

R511.4 A firm, a network firm, an audit team member, or any of that individual’s immediate family shall not make or guarantee a loan to an audit client unless the loan or guarantee is immaterial to:

(a) The firm, the network firm or the individual making the loan or guarantee, as applicable; and

(b) The client.

Loans and Guarantees with an Audit Client that is a Bank or Similar Institution

R511.5 A firm, a network firm, an audit team member, or any of that individual’s immediate family shall not accept a loan, or a guarantee of a loan, from an audit client that is a bank or a similar institution unless the loan or guarantee is made under normal lending procedures, terms and conditions.

511.5 A1 Examples of loans include mortgages, bank overdrafts, car loans, and credit card balances.

511.5 A2 Even if a firm or network firm receives a loan from an audit client that is a bank or similar institution under normal lending procedures, terms and conditions, the loan might create a self-interest threat if it is material to the audit client or firm receiving the loan.

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511.5 A3 An example of an action that might be a safeguard to address such a self-interest threat is having the work reviewed by an appropriate reviewer, who is not an audit team member, from a network firm that is not a beneficiary of the loan.

Deposits or Brokerage Accounts

R511.6 A firm, a network firm, an audit team member, or any of that individual’s immediate family shall not have deposits or a brokerage account with an audit client that is a bank, broker or similar institution, unless the deposit or account is held under normal commercial terms.

Loans and Guarantees with an Audit Client that is Not a Bank or Similar Institution

R511.7 A firm, a network firm, an audit team member, or any of that individual’s immediate family shall not accept a loan from, or have a borrowing guaranteed by, an audit client that is not a bank or similar institution, unless the loan or guarantee is immaterial to:

(a) The firm, the network firm, or the individual receiving the loan or guarantee, as applicable; and

(b) The client.

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SECTION 520

SECTION 520

BUSINESS RELATIONSHIPS



520.2 A close business relationship with an audit client or its management might create a self-interest or intimidation threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.


520.3 A1 This section contains references to the “materiality” of a financial interest and the “significance” of a business relationship. In determining whether such a financial interest is material to an individual, the combined net worth of the individual and the individual’s immediate family members may be taken into account.

520.3 A2 Examples of a close business relationship arising from a commercial relationship or common financial interest include:

● Having a financial interest in a joint venture with either the client or a controlling owner, director or officer or other individual who performs senior managerial activities for that client.

● Arrangements to combine one or more services or products of the firm or a network firm with one or more services or products of the client and to market the package with reference to both parties.

● Distribution or marketing arrangements under which the firm or a network firm distributes or markets the client’s products or services, or the client distributes or markets the firm or a network firm’s products or services.

Firm, Network Firm, Audit Team Member or Immediate Family Business Relationships

R520.4 A firm, a network firm or an audit team member shall not have a close business relationship with an audit client or its management unless any financial interest is immaterial and the business relationship is insignificant to the client or its management and the firm, the network firm or the audit team member, as applicable.

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520.4 A1 A self-interest or intimidation threat might be created if there is a close business relationship between the audit client or its management and the immediate family of an audit team member.

Common Interests in Closely-Held Entities

R520.5 A firm, a network firm, an audit team member, or any of that individual’s immediate family shall not have a business relationship involving the holding of an interest in a closely-held entity when an audit client or a director or officer of the client, or any group thereof, also holds an interest in that entity, unless:

(a) The business relationship is insignificant to the firm, the network firm, or the individual as applicable, and the client;

(b) The financial interest is immaterial to the investor or group of investors; and

(c) The financial interest does not give the investor, or group of investors, the ability to control the closely-held entity.

Buying Goods or Services

520.6 A1 The purchase of goods and services from an audit client by a firm, a network firm, an audit team member, or any of that individual’s immediate family does not usually create a threat to independence if the transaction is in the normal course of business and at arm’s length. However, such transactions might be of such a nature and magnitude that they create a self-interest threat.


● Eliminating or reducing the magnitude of the transaction.

● Removing the individual from the audit team.

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SECTION 521

FAMILY AND PERSONAL RELATIONSHIPS



521.2 Family or personal relationships with client personnel might create a self-interest, familiarity or intimidation threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.


521.3 A1 A self-interest, familiarity or intimidation threat might be created by family and personal relationships between an audit team member and a director or officer or, depending on their role, certain employees of the audit client.


● The individual’s responsibilities on the audit team.

● The role of the family member or other individual within the client, and the closeness of the relationship.

Immediate Family of an Audit Team Member

521.4 A1 A self-interest, familiarity or intimidation threat is created when an immediate family member of an audit team member is an employee in a position to exert significant influence over the client’s financial position, financial performance or cash flows.


● The position held by the immediate family member.

● The role of the audit team member.

521.4 A3 An example of an action that might eliminate such a self-interest, familiarity or intimidation threat is removing the individual from the audit team.

521.4 A4 An example of an action that might be a safeguard to address such a self-interest, familiarity or intimidation threat is structuring the responsibilities of the audit team so that the audit team member does not deal with matters that are within the responsibility of the immediate family member.

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R521.5 An individual shall not participate as an audit team member when any of that individual’s immediate family:

(a) Is a director or officer of the audit client;

(b) Is an employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion; or

(c) Was in such position during any period covered by the engagement or the financial statements.

Close Family of an Audit Team Member

521.6 A1 A self-interest, familiarity or intimidation threat is created when a close family member of an audit team member is:

(a) A director or officer of the audit client; or

(b) An employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion.


● The nature of the relationship between the audit team member and the close family member.

● The position held by the close family member.



521.6 A4 An example of an action that might be a safeguard to address such a self-interest, familiarity or intimidation threat is structuring the responsibilities of the audit team so that the audit team member does not deal with matters that are within the responsibility of the close family member.

Other Close Relationships of an Audit Team Member

R521.7 An audit team member shall consult in accordance with firm policies and procedures if the audit team member has a close relationship with an individual who is not an immediate or close family member, but who is:

(a) A director or officer of the audit client; or

(b) An employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion.

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521.7 A1 Factors that are relevant in evaluating the level of a self-interest, familiarity or intimidation threat created by such a relationship include:

● The nature of the relationship between the individual and the audit team member.

● The position the individual holds with the client.



521.7 A3 An example of an action that might be a safeguard to address such a self-interest, familiarity or intimidation threat is structuring the responsibilities of the audit team so that the audit team member does not deal with matters that are within the responsibility of the individual with whom the audit team member has a close relationship.

Relationships of Partners and Employees of the Firm

R521.8 Partners and employees of the firm shall consult in accordance with firm policies and procedures if they are aware of a personal or family relationship between:

(a) A partner or employee of the firm or network firm who is not an audit team member; and

(b) A director or officer of the audit client or an employee of the audit client in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion.

521.8 A1 Factors that are relevant in evaluating the level of a self-interest, familiarity or intimidation threat created by such a relationship include:

● The nature of the relationship between the partner or employee of the firm and the director or officer or employee of the client.

● The degree of interaction of the partner or employee of the firm with the audit team.

● The position of the partner or employee within the firm.


521.8 A2 Examples of actions that might be safeguards to address such self-interest, familiarity or intimidation threats include:

● Structuring the partner’s or employee’s responsibilities to reduce any potential influence over the audit engagement.

● Having an appropriate reviewer review the relevant audit work performed.

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SECTION 522

RECENT SERVICE WITH AN AUDIT CLIENT



522.2 If an audit team member has recently served as a director or officer, or employee of the audit client, a self-interest, self-review or familiarity threat might be created. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application MaterialService During Period Covered by the Audit Report

R522.3 The audit team shall not include an individual who, during the period covered by the audit report:

(a) Had served as a director or officer of the audit client; or

(b) Was an employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion.

Service Prior to Period Covered by the Audit Report

522.4 A1 A self-interest, self-review or familiarity threat might be created if, before the period covered by the audit report, an audit team member:

(a) Had served as a director or officer of the audit client; or

(b) Was an employee in a position to exert significant influence over the preparation of the client’s accounting records or financial statements on which the firm will express an opinion.

For example, a threat would be created if a decision made or work performed by the individual in the prior period, while employed by the client, is to be evaluated in the current period as part of the current audit engagement.


● The position the individual held with the client.

● The length of time since the individual left the client.

● The role of the audit team member.182

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522.4 A3 An example of an action that might be a safeguard to address such a self-interest, self-review or familiarity threat is having an appropriate reviewer review the work performed by the audit team member.

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SECTION 523

SERVING AS A DIRECTOR OR OFFICER OF AN AUDIT CLIENT



523.2 Serving as a director or officer of an audit client creates self-review and self-interest threats. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application MaterialService as Director or Officer

R523.3 A partner or employee of the firm or a network firm shall not serve as a director or officer of an audit client of the firm.

Service as Company Secretary

R523.4 A partner or employee of the firm or a network firm shall not serve as Company Secretary for an audit client of the firm, unless:

(a) This practice is specifically permitted under local law, professional rules or practice;

(b) Management makes all relevant decisions; and

(c) The duties and activities performed are limited to those of a routine and administrative nature, such as preparing minutes and maintaining statutory returns.

523.4 A1 The position of Company Secretary has different implications in different jurisdictions. Duties might range from: administrative duties (such as personnel management and the maintenance of company records and registers) to duties as diverse as ensuring that the company complies with regulations or providing advice on corporate governance matters. Usually this position is seen to imply a close association with the entity. Therefore, a threat is created if a partner or employee of the firm or a network firm serves as Company Secretary for an audit client. (More information on providing non-assurance services to an audit client is set out in Section 600, Provision of Non-assurance Services to an Audit Client.)

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SECTION 524

EMPLOYMENT WITH AN AUDIT CLIENT



524.2 Employment relationships with an audit client might create a self-interest, familiarity or intimidation threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application MaterialAll Audit Clients

524.3 A1 A familiarity or intimidation threat might be created if any of the following individuals have been an audit team member or partner of the firm or a network firm:

● A director or officer of the audit client.

● An employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion.

Former Partner or Audit Team Member Restrictions

R524.4 The firm shall ensure that no significant connection remains between the firm or a network firm and:

(a) A former partner who has joined an audit client of the firm; or

(b) A former audit team member who has joined the audit client,

if either has joined the audit client as:

(i) A director or officer; or

(ii) An employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion.

A significant connection remains between the firm or a network firm and the individual, unless:

(a) The individual is not entitled to any benefits or payments from the firm or network firm that are not made in accordance with fixed pre-determined arrangements;

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(b) Any amount owed to the individual is not material to the firm or the network firm; and

(c) The individual does not continue to participate or appear to participate in the firm’s or the network firm’s business or professional activities.

524.4 A1 Even if the requirements of paragraph R524.4 are met, a familiarity or intimidation threat might still be created.

524.4 A2 A familiarity or intimidation threat might also be created if a former partner of the firm or network firm has joined an entity in one of the positions described in paragraph 524.3 A1 and the entity subsequently becomes an audit client of the firm.


● The position the individual has taken at the client.

● Any involvement the individual will have with the audit team.

● The length of time since the individual was an audit team member or partner of the firm or network firm.

● The former position of the individual within the audit team, firm or network firm. An example is whether the individual was responsible for maintaining regular contact with the client’s management or those charged with governance.

524.4 A4 Examples of actions that might be safeguards to address such familiarity or intimidation threats include:

● Modifying the audit plan.

● Assigning to the audit team individuals who have sufficient experience relative to the individual who has joined the client.

● Having an appropriate reviewer review the work of the former audit team member.

Audit Team Members Entering Employment with a Client

R524.5 A firm or network firm shall have policies and procedures that require audit team members to notify the firm or network firm when entering employment negotiations with an audit client.

524.5 A1 A self-interest threat is created when an audit team member participates in the audit engagement while knowing that the audit team member will, or might, join the client at some time in the future.

524.5 A2 An example of an action that might eliminate such a self-interest threat is removing the individual from the audit team.

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524.5 A3 An example of an action that might be a safeguard to address such a self-interest threat is having an appropriate reviewer review any significant judgments made by that individual while on the team.


Key Audit Partners

R524.6 Subject to paragraph R524.8, if an individual who was a key audit partner with respect to an audit client that is a public interest entity joins the client as:

(a) A director or officer; or

(b) An employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion,

independence is compromised unless, subsequent to the individual ceasing to be a key audit partner:

(i) The audit client has issued audited financial statements covering a period of not less than twelve months; and

(ii) The individual was not an audit team member with respect to the audit of those financial statements.

Senior or Managing Partner (Chief Executive or Equivalent) of the Firm

R524.7 Subject to paragraph R524.8, if an individual who was the Senior or Managing Partner (Chief Executive or equivalent) of the firm joins an audit client that is a public interest entity as:


(b) An employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion,

independence is compromised, unless twelve months have passed since the individual was the Senior or Managing Partner (Chief Executive or equivalent) of the firm.

Business Combinations

R524.8 As an exception to paragraphs R524.6 and R524.7, independence is not compromised if the circumstances set out in those paragraphs arise as a result of a business combination and:

(a) The position was not taken in contemplation of the business combination;

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(b) Any benefits or payments due to the former partner from the firm or a network firm have been settled in full, unless made in accordance with fixed pre-determined arrangements and any amount owed to the partner is not material to the firm or network firm as applicable;

(c) The former partner does not continue to participate or appear to participate in the firm’s or network firm’s business or professional activities; and

(d) The firm discusses the former partner’s position held with the audit client with those charged with governance.

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SECTION 525

TEMPORARY PERSONNEL ASSIGNMENTS



525.2 The loan of personnel to an audit client might create a self-review, advocacy or familiarity threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.


525.3 A1 Examples of actions that might be safeguards to address threats created by the loan of personnel by a firm or a network firm to an audit client include:

● Conducting an additional review of the work performed by the loaned personnel might address a self-review threat.

● Not including the loaned personnel as an audit team member might address a familiarity or advocacy threat.

● Not giving the loaned personnel audit responsibility for any function or activity that the personnel performed during the loaned personnel assignment might address a self-review threat.

525.3 A2 When familiarity and advocacy threats are created by the loan of personnel by a firm or a network firm to an audit client, such that the firm or the network firm becomes too closely aligned with the views and interests of management, safeguards are often not available.

R525.4 A firm or network firm shall not loan personnel to an audit client unless:

(a) Such assistance is provided only for a short period of time;

(b) The personnel are not involved in providing non-assurance services that would not be permitted under Section 600 and its subsections; and

(c) The personnel do not assume management responsibilities and the audit client is responsible for directing and supervising the activities of the personnel.

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SECTION 540

LONG ASSOCIATION OF PERSONNEL (INCLUDING PARTNER ROTATION) WITH AN AUDIT CLIENT



540.2 When an individual is involved in an audit engagement over a long period of time, familiarity and self-interest threats might be created. This section sets out requirements and application material relevant to applying the conceptual framework in such circumstances.


540.3 A1 Although an understanding of an audit client and its environment is fundamental to audit quality, a familiarity threat might be created as a result of an individual’s long association as an audit team member with:

(a) The audit client and its operations;

(b) The audit client’s senior management; or

(c) The financial statements on which the firm will express an opinion or the financial information which forms the basis of the financial statements.

540.3 A2 A self-interest threat might be created as a result of an individual’s concern about losing a longstanding client or an interest in maintaining a close personal relationship with a member of senior management or those charged with governance. Such a threat might influence the individual’s judgment inappropriately.

540.3 A3 Factors that are relevant to evaluating the level of such familiarity or self-interest threats include:

(a) In relation to the individual:

● The overall length of the individual’s relationship with the client, including if such relationship existed while the individual was at a prior firm.

● How long the individual has been an engagement team member, and the nature of the roles performed.

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● The extent to which the work of the individual is directed, reviewed and supervised by more senior personnel.

● The extent to which the individual, due to the individual’s seniority, has the ability to influence the outcome of the audit, for example, by making key decisions or directing the work of other engagement team members.

● The closeness of the individual’s personal relationship with senior management or those charged with governance.

● The nature, frequency and extent of the interaction between the individual and senior management or those charged with governance.

(b) In relation to the audit client:

● The nature or complexity of the client’s accounting and financial reporting issues and whether they have changed.

● Whether there have been any recent changes in senior management or those charged with governance.

● Whether there have been any structural changes in the client’s organization which impact the nature, frequency and extent of interactions the individual might have with senior management or those charged with governance.

540.3 A4 The combination of two or more factors might increase or reduce the level of the threats. For example, familiarity threats created over time by the increasingly close relationship between an individual and a member of the client’s senior management would be reduced by the departure of that member of the client’s senior management.

540.3 A5 An example of an action that might eliminate the familiarity and self-interest threats created by an individual being involved in an audit engagement over a long period of time would be rotating the individual off the audit team.

540.3 A6 Examples of actions that might be safeguards to address such familiarity or self-interest threats include:

● Changing the role of the individual on the audit team or the nature and extent of the tasks the individual performs.

● Having an appropriate reviewer who was not an audit team member review the work of the individual.

● Performing regular independent internal or external quality reviews of the engagement.

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R540.4 If a firm decides that the level of the threats created can only be addressed by rotating the individual off the audit team, the firm shall determine an appropriate period during which the individual shall not:

(a) Be a member of the engagement team for the audit engagement;

(b) Provide quality control for the audit engagement; or

(c) Exert direct influence on the outcome of the audit engagement.

The period shall be of sufficient duration to allow the familiarity and self-interest threats to be addressed. In the case of a public interest entity, paragraphs R540.5 to R540.20 also apply.


R540.5 Subject to paragraphs R540.7 to R540.9, in respect of an audit of a public interest entity, an individual shall not act in any of the following roles, or a combination of such roles, for a period of more than seven cumulative years (the “time-on” period):

(a) The engagement partner;

(b) The individual appointed as responsible for the engagement quality control review; or

(c) Any other key audit partner role.

After the time-on period, the individual shall serve a “cooling-off” period in accordance with the provisions in paragraphs R540.11 to R540.19.

R540.6 In calculating the time-on period, the count of years shall not be restarted unless the individual ceases to act in any one of the roles in paragraph R540.5(a) to (c) for a minimum period. This minimum period is a consecutive period equal to at least the cooling-off period determined in accordance with paragraphs R540.11 to R540.13 as applicable to the role in which the individual served in the year immediately before ceasing such involvement.

540.6 A1 For example, an individual who served as engagement partner for four years followed by three years off can only act thereafter as a key audit partner on the same audit engagement for three further years (making a total of seven cumulative years). Thereafter, that individual is required to cool off in accordance with paragraph R540.14.

R540.7 As an exception to paragraph R540.5, key audit partners whose continuity is especially important to audit quality may, in rare cases due to unforeseen circumstances outside the firm’s control, and with the concurrence of those charged with governance, be permitted to serve an additional year as a key audit partner as long as the threat to independence can be eliminated or reduced to an acceptable level.

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540.7 A1 For example, a key audit partner may remain in that role on the audit team for up to one additional year in circumstances where, due to unforeseen events, a required rotation was not possible, as might be the case due to serious illness of the intended engagement partner. In such circumstances, this will involve the firm discussing with those charged with governance the reasons why the planned rotation cannot take place and the need for any safeguards to reduce any threat created.

R540.8 If an audit client becomes a public interest entity, a firm shall take into account the length of time an individual has served the audit client as a key audit partner before the client becomes a public interest entity in determining the timing of the rotation. If the individual has served the audit client as a key audit partner for a period of five cumulative years or less when the client becomes a public interest entity, the number of years the individual may continue to serve the client in that capacity before rotating off the engagement is seven years less the number of years already served. As an exception to paragraph R540.5, if the individual has served the audit client as a key audit partner for a period of six or more cumulative years when the client becomes a public interest entity, the individual may continue to serve in that capacity with the concurrence of those charged with governance for a maximum of two additional years before rotating off the engagement.

R540.9 When a firm has only a few people with the necessary knowledge and experience to serve as a key audit partner on the audit of a public interest entity, rotation of key audit partners might not be possible. As an exception to paragraph R540.5, if an independent regulatory body in the relevant jurisdiction has provided an exemption from partner rotation in such circumstances, an individual may remain a key audit partner for more than seven years, in accordance with such exemption. This is provided that the independent regulatory body has specified other requirements which are to be applied, such as the length of time that the key audit partner may be exempted from rotation or a regular independent external review.

Other Considerations Relating to the Time-on Period

R540.10 In evaluating the threats created by an individual’s long association with an audit engagement, a firm shall give particular consideration to the roles undertaken and the length of an individual’s association with the audit engagement prior to the individual becoming a key audit partner.

540.10 A1 There might be situations where the firm, in applying the conceptual framework, concludes that it is not appropriate for an individual who is a key audit partner to continue in that role even though the length of time served as a key audit partner is less than seven years.

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Cooling-off Period

R540.11 If the individual acted as the engagement partner for seven cumulative years, the cooling-off period shall be five consecutive years.

R540.12 Where the individual has been appointed as responsible for the engagement quality control review and has acted in that capacity for seven cumulative years, the cooling-off period shall be three consecutive years.

R540.13 If the individual has acted as a key audit partner other than in the capacities set out in paragraphs R540.11 and R540.12 for seven cumulative years, the cooling-off period shall be two consecutive years.

Service in a combination of key audit partner roles

R540.14 If the individual acted in a combination of key audit partner roles and served as the engagement partner for four or more cumulative years, the cooling-off period shall be five consecutive years.

R540.15 Subject to paragraph R540.16(a), if the individual acted in a combination of key audit partner roles and served as the key audit partner responsible for the engagement quality control review for four or more cumulative years, the cooling-off period shall be three consecutive years.

R540.16 If an individual has acted in a combination of engagement partner and engagement quality control review roles for four or more cumulative years during the time-on period, the cooling-off period shall:

(a) As an exception to paragraph R540.15, be five consecutive years where the individual has been the engagement partner for three or more years; or

(b) Be three consecutive years in the case of any other combination.

R540.17 If the individual acted in any combination of key audit partner roles other than those addressed in paragraphs R540.14 to R540.16, the cooling-off period shall be two consecutive years.

Service at a Prior Firm

R540.18 In determining the number of years that an individual has been a key audit partner as set out in paragraph R540.5, the length of the relationship shall, where relevant, include time while the individual was a key audit partner on that engagement at a prior firm.

Shorter Cooling-off Period Established by Law or Regulation

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in paragraphs R540.11, R540.14 and R540.16(a) provided that the applicable time-on period does not exceed seven years.

Restrictions on Activities During the Cooling-off Period

R540.20 For the duration of the relevant cooling-off period, the individual shall not:

(a) Be an engagement team member or provide quality control for the audit engagement;

(b) Consult with the engagement team or the client regarding technical or industry-specific issues, transactions or events affecting the audit engagement (other than discussions with the engagement team limited to work undertaken or conclusions reached in the last year of the individual’s time-on period where this remains relevant to the audit);

(c) Be responsible for leading or coordinating the professional services provided by the firm or a network firm to the audit client, or overseeing the relationship of the firm or a network firm with the audit client; or

(d) Undertake any other role or activity not referred to above with respect to the audit client, including the provision of non-assurance services that would result in the individual:

(i) Having significant or frequent interaction with senior management or those charged with governance; or

(ii) Exerting direct influence on the outcome of the audit engagement.

540.20 A1 The provisions of paragraph R540.20 are not intended to prevent the individual from assuming a leadership role in the firm or a network firm, such as that of the Senior or Managing Partner (Chief Executive or equivalent).

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SECTION 600

PROVISION OF NON-ASSURANCE SERVICES TO AN AUDIT CLIENT


independent, and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to independence.

600.2 Firms and network firms might provide a range of non-assurance services to their audit clients, consistent with their skills and expertise. Providing non-assurance services to audit clients might create threats to compliance with the fundamental principles and threats to independence.

600.3 This section sets out requirements and application material relevant to applying the conceptual framework to identify, evaluate and address threats to independence when providing non-assurance services to audit clients. The subsections that follow set out specific requirements and application material relevant when a firm or network firm provides certain non-assurance services to audit clients and indicate the types of threats that might be created as a result. Some of the subsections include requirements that expressly prohibit a firm or network firm from providing certain services to an audit client in certain circumstances because the threats created cannot be addressed by applying safeguards.


R600.4 Before a firm or a network firm accepts an engagement to provide a non-assurance service to an audit client, the firm shall determine whether providing such a service might create a threat to independence.

600.4 A1 The requirements and application material in this section assist the firm in analyzing certain types of non-assurance services and the related threats that might be created if a firm or network firm provides non-assurance services to an audit client.

600.4 A2 New business practices, the evolution of financial markets and changes in information technology, are among the developments that make it impossible to draw up an all-inclusive list of non-assurance services that might be provided to an audit client. As a result, the Code does not include an exhaustive list of all non-assurance services that might be provided to an audit client.

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Evaluating Threats

600.5 A1 Factors that are relevant in evaluating the level of threats created by providing a non-assurance service to an audit client include:

● The nature, scope and purpose of the service.

● The degree of reliance that will be placed on the outcome of the service as part of the audit.

● The legal and regulatory environment in which the service is provided.

● Whether the outcome of the service will affect matters reflected in the financial statements on which the firm will express an opinion, and, if so:

○ The extent to which the outcome of the service will have a material effect on the financial statements.

○ The degree of subjectivity involved in determining the appropriate amounts or treatment for those matters reflected in the financial statements.

● The level of expertise of the client’s management and employees with respect to the type of service provided.

● The extent of the client’s involvement in determining significant matters of judgment.

● The nature and extent of the impact of the service, if any, on the systems that generate information that forms a significant part of the client’s:

○ Accounting records or financial statements on which the firm will express an opinion.

○ Internal controls over financial reporting.

● Whether the client is a public interest entity. For example, providing a non-assurance service to an audit client that is a public interest entity might be perceived to result in a higher level of a threat.

600.5 A2 Subsections 601 to 610 include examples of additional factors that are relevant in evaluating the level of threats created by providing the non-assurance services set out in those subsections.

Materiality in Relation to Financial Statements

600.5 A3 Subsections 601 to 610 refer to materiality in relation to an audit client’s financial statements. The concept of materiality in relation to an audit is addressed in ISA 320, Materiality in Planning and Performing an 197

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Audit, and in relation to a review in ISRE 2400 (Revised), Engagements to Review Historical Financial Statements. The determination of materiality involves the exercise of professional judgment and is impacted by both quantitative and qualitative factors. It is also affected by perceptions of the financial information needs of users.

Multiple Non-assurance Services Provided to the Same Audit Client

600.5 A4 A firm or network firm might provide multiple non-assurance services to an audit client. In these circumstances the consideration of the combined effect of threats created by providing those services is relevant to the firm’s evaluation of threats.

Addressing Threats

600.6 A1 Subsections 601 to 610 include examples of actions, including safeguards, that might address threats to independence created by providing those non-assurance services when threats are not at an acceptable level. Those examples are not exhaustive.

600.6 A2 Some of the subsections include requirements that expressly prohibit a firm or network firm from providing certain services to an audit client in certain circumstances because the threats created cannot be addressed by applying safeguards.

600.6 A3 Paragraph 120.10 A2 includes a description of safeguards. In relation to providing non-assurance services to audit clients, safeguards are actions, individually or in combination, that the firm takes that effectively reduce threats to independence to an acceptable level. In some situations, when a threat is created by providing a non-assurance service to an audit client, safeguards might not be available. In such situations, the application of the conceptual framework set out in Section 120 requires the firm to decline or end the non-assurance service or the audit engagement.

Prohibition on Assuming Management Responsibilities

R600.7 A firm or a network firm shall not assume a management responsibility for an audit client.

600.7 A1 Management responsibilities involve controlling, leading and directing an entity, including making decisions regarding the acquisition, deployment and control of human, financial, technological, physical and intangible resources.

600.7 A2 Providing a non-assurance service to an audit client creates self-review and self-interest threats if the firm or network firm assumes a management responsibility when performing the service. Assuming a management responsibility also creates a familiarity threat and might

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create an advocacy threat because the firm or network firm becomes too closely aligned with the views and interests of management.

600.7 A3 Determining whether an activity is a management responsibility depends on the circumstances and requires the exercise of professional judgment. Examples of activities that would be considered a management responsibility include:

● Setting policies and strategic direction.

● Hiring or dismissing employees.

● Directing and taking responsibility for the actions of employees in relation to the employees’ work for the entity.

● Authorizing transactions.

● Controlling or managing bank accounts or investments.

● Deciding which recommendations of the firm or network firm or other third parties to implement.

● Reporting to those charged with governance on behalf of management.

● Taking responsibility for:

○ The preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework.

○ Designing, implementing, monitoring or maintaining internal control.

600.7 A4 Providing advice and recommendations to assist the management of an audit client in discharging its responsibilities is not assuming a management responsibility. (Ref: Para. R600.7 to 600.7 A3).

R600.8 To avoid assuming a management responsibility when providing any non-assurance service to an audit client, the firm shall be satisfied that client management makes all judgments and decisions that are the proper responsibility of management. This includes ensuring that the client’s management:

(a) Designates an individual who possesses suitable skill, knowledge and experience to be responsible at all times for the client’s decisions and to oversee the services. Such an individual, preferably within senior management, would understand:

(i) The objectives, nature and results of the services; and

(ii) The respective client and firm or network firm responsibilities. 199

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However, the individual is not required to possess the expertise to perform or re-perform the services.

(b) Provides oversight of the services and evaluates the adequacy of the results of the service performed for the client’s purpose.

(c) Accepts responsibility for the actions, if any, to be taken arising from the results of the services.

Providing Non-Assurance Services to an Audit Client that Later Becomes a Public Interest Entity

R600.9 A non-assurance service provided, either currently or previously, by a firm or a network firm to an audit client compromises the firm’s independence when the client becomes a public interest entity unless:

(a) The previous non-assurance service complies with the provisions of this section that relate to audit clients that are not public interest entities;

(b) Non-assurance services currently in progress that are not permitted under this section for audit clients that are public interest entities are ended before, or as soon as practicable after, the client becomes a public interest entity; and

(c) The firm addresses threats that are created that are not at an acceptable level.

Considerations for Certain Related Entities

R600.10 This section includes requirements that prohibit firms and network firms from assuming management responsibilities or providing certain non-assurance services to audit clients. As an exception to those requirements, a firm or network firm may assume management responsibilities or provide certain non-assurance services that would otherwise be prohibited to the following related entities of the client on whose financial statements the firm will express an opinion:

(a) An entity that has direct or indirect control over the client;

(b) An entity with a direct financial interest in the client if that entity has significant influence over the client and the interest in the client is material to such entity; or

(c) An entity which is under common control with the client,

provided that all of the following conditions are met:

(i) The firm or a network firm does not express an opinion on the financial statements of the related entity;

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(ii) The firm or a network firm does not assume a management responsibility, directly or indirectly, for the entity on whose financial statements the firm will express an opinion;

(iii) The services do not create a self-review threat because the results of the services will not be subject to audit procedures; and

(iv) The firm addresses other threats created by providing such services that are not at an acceptable level.

SUBSECTION 601 – ACCOUNTING AND BOOKKEEPING SERVICES

Introduction601.1 Providing accounting and bookkeeping services to an audit client might

create a self-review threat.

601.2 In addition to the specific requirements and application material in this subsection, the requirements and application material in paragraphs 600.1 to R600.10 are relevant to applying the conceptual framework when providing an audit client with accounting and bookkeeping services. This subsection includes requirements that prohibit firms and network firms from providing certain accounting and bookkeeping services to audit clients in some circumstances because the threats created cannot be addressed by applying safeguards.


601.3 A1 Accounting and bookkeeping services comprise a broad range of services including:

● Preparing accounting records and financial statements.

● Recording transactions.

● Payroll services.

601.3 A2 Management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework. These responsibilities include:

● Determining accounting policies and the accounting treatment in accordance with those policies.

● Preparing or changing source documents or originating data, in electronic or other form, evidencing the occurrence of a transaction. Examples include:

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○ Purchase orders.

○ Payroll time records.

○ Customer orders.

● Originating or changing journal entries.

● Determining or approving the account classifications of transactions.

601.3 A3 The audit process necessitates dialogue between the firm and the management of the audit client, which might involve:

● Applying accounting standards or policies and financial statement disclosure requirements.

● Assessing the appropriateness of financial and accounting control and the methods used in determining the stated amounts of assets and liabilities.

● Proposing adjusting journal entries.

These activities are considered to be a normal part of the audit process and do not usually create threats as long as the client is responsible for making decisions in the preparation of accounting records and financial statements.

601.3 A4 Similarly, the client might request technical assistance on matters such as resolving account reconciliation problems or analyzing and accumulating information for regulatory reporting. In addition, the client might request technical advice on accounting issues such as the conversion of existing financial statements from one financial reporting framework to another. Examples include:

● Complying with group accounting policies.

● Transitioning to a different financial reporting framework such as International Financial Reporting Standards.

Such services do not usually create threats provided neither the firm nor network firm assumes a management responsibility for the client.

Accounting and Bookkeeping Services that are Routine or Mechanical

601.4 A1 Accounting and bookkeeping services that are routine or mechanical in nature require little or no professional judgment. Some examples of these services are:

● Preparing payroll calculations or reports based on client-originated data for approval and payment by the client.

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● Recording recurring transactions for which amounts are easily determinable from source documents or originating data, such as a utility bill where the client has determined or approved the appropriate account classification.

● Calculating depreciation on fixed assets when the client determines the accounting policy and estimates of useful life and residual values.

● Posting transactions coded by the client to the general ledger.

● Posting client-approved entries to the trial balance.

● Preparing financial statements based on information in the client-approved trial balance and preparing related notes based on client-approved records.

Audit Clients that are Not Public Interest Entities

R601.5 A firm or a network firm shall not provide to an audit client that is not a public interest entity accounting and bookkeeping services including preparing financial statements on which the firm will express an opinion or financial information which forms the basis of such financial statements, unless:

(a) The services are of a routine or mechanical nature; and

(b) The firm addresses any threats that are created by providing such services that are not at an acceptable level.

601.5 A1 Examples of actions that might be safeguards to address a self-review threat created when providing accounting and bookkeeping services of a routine and mechanical nature to an audit client include:


● Having an appropriate reviewer who was not involved in providing the service review the audit work or service performed.


R601.6 Subject to paragraph R601.7, a firm or a network firm shall not provide to an audit client that is a public interest entity accounting and bookkeeping services including preparing financial statements on which the firm will express an opinion or financial information which forms the basis of such financial statements.

R601.7 As an exception to paragraph R601.6, a firm or network firm may provide accounting and bookkeeping services of a routine or mechanical

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nature for divisions or related entities of an audit client that is a public interest entity if the personnel providing the services are not audit team members and:

(a) The divisions or related entities for which the service is provided are collectively immaterial to the financial statements on which the firm will express an opinion; or

(b) The service relates to matters that are collectively immaterial to the financial statements of the division or related entity.

SUBSECTION 602 – ADMINISTRATIVE SERVICES

Introduction602.1 Providing administrative services to an audit client does not usually

create a threat.

602.2 In addition to the specific application material in this subsection, the requirements and application material in paragraphs 600.1 to R600.10 are relevant to applying the conceptual framework when providing administrative services.

Application Material All Audit Clients

602.3 A1 Administrative services involve assisting clients with their routine or mechanical tasks within the normal course of operations. Such services require little to no professional judgment and are clerical in nature.

602.3 A2 Examples of administrative services include:

● Word processing services.

● Preparing administrative or statutory forms for client approval.

● Submitting such forms as instructed by the client.

● Monitoring statutory filing dates, and advising an audit client of those dates.

SUBSECTION 603 – VALUATION SERVICES

Introduction603.1 Providing valuation services to an audit client might create a self-

review or advocacy threat.

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subsection includes requirements that prohibit firms and network firms from providing certain valuation services to audit clients in some circumstances because the threats created cannot be addressed by applying safeguards.


603.3 A1 A valuation comprises the making of assumptions with regard to future developments, the application of appropriate methodologies and techniques, and the combination of both to compute a certain value, or range of values, for an asset, a liability or for a business as a whole.

603.3 A2 If a firm or network firm is requested to perform a valuation to assist an audit client with its tax reporting obligations or for tax planning purposes and the results of the valuation will not have a direct effect on the financial statements, the application material set out in paragraphs 604.9 A1 to 604.9 A5, relating to such services, applies.

603.3 A3 Factors that are relevant in evaluating the level of self-review or advocacy threats created by providing valuation services to an audit client include:

● The use and purpose of the valuation report.

● Whether the valuation report will be made public.

● The extent of the client’s involvement in determining and approving the valuation methodology and other significant matters of judgment.

● The degree of subjectivity inherent in the item for valuations involving standard or established methodologies.

● Whether the valuation will have a material effect on the financial statements.

● The extent and clarity of the disclosures related to the valuation in the financial statements.

● The degree of dependence on future events of a nature that might create significant volatility inherent in the amounts involved.

603.3 A4 Examples of actions that might be safeguards to address threats include:

● Using professionals who are not audit team members to perform the service might address self-review or advocacy threats.

● Having an appropriate reviewer who was not involved in providing the service review the audit work or service performed might address a self-review threat.

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R603.4 A firm or a network firm shall not provide a valuation service to an audit client that is not a public interest entity if:

(a) The valuation involves a significant degree of subjectivity; and

(b) The valuation will have a material effect on the financial statements on which the firm will express an opinion.

603.4 A1 Certain valuations do not involve a significant degree of subjectivity. This is likely to be the case when the underlying assumptions are either established by law or regulation, or are widely accepted and when the techniques and methodologies to be used are based on generally accepted standards or prescribed by law or regulation. In such circumstances, the results of a valuation performed by two or more parties are not likely to be materially different.


R603.5 A firm or a network firm shall not provide a valuation service to an audit client that is a public interest entity if the valuation service would have a material effect, individually or in the aggregate, on the financial statements on which the firm will express an opinion.

SUBSECTION 604 – TAX SERVICES

Introduction604.1 Providing tax services to an audit client might create a self-review or

advocacy threat.

604.2 In addition to the specific requirements and application material in this subsection, the requirements and application material in paragraphs 600.1 to R600.10 are relevant to applying the conceptual framework when providing a tax service to an audit client. This subsection includes requirements that prohibit firms and network firms from providing certain tax services to audit clients in some circumstances because the threats created cannot be addressed by applying safeguards.

Requirements and Application Material

All Audit Clients 604.3 A1 Tax services comprise a broad range of services, including activities

such as:

● Tax return preparation.

● Tax calculations for the purpose of preparing the accounting entries.

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● Tax planning and other tax advisory services.

● Tax services involving valuations.

● Assistance in the resolution of tax disputes.

While this subsection deals with each type of tax service listed above under separate headings, in practice, the activities involved in providing tax services are often inter-related.

604.3 A2 Factors that are relevant in evaluating the level of threats created by providing any tax service to an audit client include:

● The particular characteristics of the engagement.

● The level of tax expertise of the client’s employees.

● The system by which the tax authorities assess and administer the tax in question and the role of the firm or network firm in that process.

● The complexity of the relevant tax regime and the degree of judgment necessary in applying it.

Tax Return PreparationAll Audit Clients

604.4 A1 Providing tax return preparation services does not usually create a threat.

604.4 A2 Tax return preparation services involve:

● Assisting clients with their tax reporting obligations by drafting and compiling information, including the amount of tax due (usually on standardized forms) required to be submitted to the applicable tax authorities.

● Advising on the tax return treatment of past transactions and responding on behalf of the audit client to the tax authorities’ requests for additional information and analysis (for example, providing explanations of and technical support for the approach being taken).

604.4 A3 Tax return preparation services are usually based on historical information and principally involve analysis and presentation of such historical information under existing tax law, including precedents and established practice. Further, the tax returns are subject to whatever review or approval process the tax authority considers appropriate.

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Tax Calculations for the Purpose of Preparing Accounting Entries All Audit Clients

604.5 A1 Preparing calculations of current and deferred tax liabilities (or assets) for an audit client for the purpose of preparing accounting entries that will be subsequently audited by the firm creates a self-review threat.

604.5 A2 In addition to the factors in paragraph 604.3 A2, a factor that is relevant in evaluating the level of the threat created when preparing such calculations for an audit client is whether the calculation might have a material effect on the financial statements on which the firm will express an opinion.


604.5 A3 Examples of actions that might be safeguards to address such a self-review threat when the audit client is not a public interest entity include:


● Having an appropriate reviewer who was not involved in providing the service review the audit work or service performed.


R604.6 A firm or a network firm shall not prepare tax calculations of current and deferred tax liabilities (or assets) for an audit client that is a public interest entity for the purpose of preparing accounting entries that are material to the financial statements on which the firm will express an opinion.

604.6 A1 The examples of actions that might be safeguards in paragraph 604.5 A3 to address self-review threats are also applicable when preparing tax calculations of current and deferred tax liabilities (or assets) to an audit client that is a public interest entity that are immaterial to the financial statements on which the firm will express an opinion.

Tax Planning and Other Tax Advisory ServicesAll Audit Clients

604.7 A1 Providing tax planning and other tax advisory services might create a self-review or advocacy threat.

604.7 A2 Tax planning or other tax advisory services comprise a broad range of services, such as advising the client how to structure its affairs in a tax efficient manner or advising on the application of a new tax law or regulation.

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604.7 A3 In addition to paragraph 604.3 A2, factors that are relevant in evaluating the level of self-review or advocacy threats created by providing tax planning and other tax advisory services to audit clients include:

● The degree of subjectivity involved in determining the appropriate treatment for the tax advice in the financial statements.

● Whether the tax treatment is supported by a private ruling or has otherwise been cleared by the tax authority before the preparation of the financial statements.

For example, whether the advice provided as a result of the tax planning and other tax advisory services:

○ Is clearly supported by a tax authority or other precedent.

○ Is an established practice.

○ Has a basis in tax law that is likely to prevail.

● The extent to which the outcome of the tax advice will have a material effect on the financial statements.

● Whether the effectiveness of the tax advice depends on the accounting treatment or presentation in the financial statements and there is doubt as to the appropriateness of the accounting treatment or presentation under the relevant financial reporting framework.



● Having an appropriate reviewer, who was not involved in providing the service review the audit work or service performed might address a self-review threat.

● Obtaining pre-clearance from the tax authorities might address self-review or advocacy threats.

When Effectiveness of Tax Advice Is Dependent on a Particular Accounting Treatment or Presentation

R604.8 A firm or a network firm shall not provide tax planning and other tax advisory services to an audit client when the effectiveness of the tax advice depends on a particular accounting treatment or presentation in the financial statements and:

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(a) The audit team has reasonable doubt as to the appropriateness of the related accounting treatment or presentation under the relevant financial reporting framework; and

(b) The outcome or consequences of the tax advice will have a material effect on the financial statements on which the firm will express an opinion.

Tax Services Involving ValuationsAll Audit Clients

604.9 A1 Providing tax valuation services to an audit client might create a self-review or advocacy threat.

604.9 A2 A firm or a network firm might perform a valuation for tax purposes only, where the result of the valuation will not have a direct effect on the financial statements (that is, the financial statements are only affected through accounting entries related to tax). This would not usually create threats if the effect on the financial statements is immaterial or the valuation is subject to external review by a tax authority or similar regulatory authority.

604.9 A3 If the valuation that is performed for tax purposes is not subject to an external review and the effect is material to the financial statements, in addition to paragraph 604.3 A2, the following factors are relevant in evaluating the level of self-review or advocacy threats created by providing those services to an audit client:

● The extent to which the valuation methodology is supported by tax law or regulation, other precedent or established practice.

● The degree of subjectivity inherent in the valuation.

● The reliability and extent of the underlying data.




● Obtaining pre-clearance from the tax authorities might address self-review or advocacy threats.

604.9 A5 A firm or network firm might also perform a tax valuation to assist an audit client with its tax reporting obligations or for tax planning purposes where the result of the valuation will have a direct effect

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on the financial statements. In such situations, the requirements and application material set out in Subsection 603 relating to valuation services apply.

Assistance in the Resolution of Tax DisputesAll Audit Clients

604.10 A1 Providing assistance in the resolution of tax disputes to an audit client might create a self-review or advocacy threat.

604.10 A2 A tax dispute might reach a point when the tax authorities have notified an audit client that arguments on a particular issue have been rejected and either the tax authority or the client refers the matter for determination in a formal proceeding, for example, before a public tribunal or court.

604.10 A3 In addition to paragraph 604.3 A2, factors that are relevant in evaluating the level of self-review or advocacy threats created by assisting an audit client in the resolution of tax disputes include:

● The role management plays in the resolution of the dispute.

● The extent to which the outcome of the dispute will have a material effect on the financial statements on which the firm will express an opinion.

● Whether the advice that was provided is the subject of the tax dispute.

● The extent to which the matter is supported by tax law or regulation, other precedent, or established practice.

● Whether the proceedings are conducted in public.



● Having an appropriate reviewer who was not involved in providing the service review the audit work or the service performed might address a self-review threat.

Resolution of Tax Matters Involving Acting as An Advocate

R604.11 A firm or a network firm shall not provide tax services that involve assisting in the resolution of tax disputes to an audit client if:

(a) The services involve acting as an advocate for the audit client before a public tribunal or court in the resolution of a tax matter; and

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(b) The amounts involved are material to the financial statements on which the firm will express an opinion.

604.11 A1 Paragraph R604.11 does not preclude a firm or network firm from having a continuing advisory role in relation to the matter that is being heard before a public tribunal or court, for example:

● Responding to specific requests for information.

● Providing factual accounts or testimony about the work performed.

● Assisting the client in analyzing the tax issues related to the matter.

604.11 A2 What constitutes a “public tribunal or court” depends on how tax proceedings are heard in the particular jurisdiction.

SUBSECTION 605 – INTERNAL AUDIT SERVICES

Introduction605.1 Providing internal audit services to an audit client might create a self-

review threat.

605.2 In addition to the specific requirements and application material in this subsection, the requirements and application material in paragraphs 600.1 to R600.10 are relevant to applying the conceptual framework when providing an internal audit service to an audit client. This subsection includes requirements that prohibit firms and network firms from providing certain internal audit services to audit clients in some circumstances because the threats created cannot be addressed by applying safeguards.


605.3 A1 Internal audit services involve assisting the audit client in the performance of its internal audit activities. Internal audit activities might include:

● Monitoring of internal control – reviewing controls, monitoring their operation and recommending improvements to them.

● Examining financial and operating information by:

○ Reviewing the means used to identify, measure, classify and report financial and operating information.

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○ Inquiring specifically into individual items including detailed testing of transactions, balances and procedures.

● Reviewing the economy, efficiency and effectiveness of operating activities including non-financial activities of an entity.

● Reviewing compliance with:

○ Laws, regulations and other external requirements.

○ Management policies, directives and other internal requirements.

605.3 A2 The scope and objectives of internal audit activities vary widely and depend on the size and structure of the entity and the requirements of management and those charged with governance.

R605.4 When providing an internal audit service to an audit client, the firm shall be satisfied that:

(a) The client designates an appropriate and competent resource, preferably within senior management, to:

(i) Be responsible at all times for internal audit activities; and

(ii) Acknowledge responsibility for designing, implementing, monitoring and maintaining internal control.

(b) The client’s management or those charged with governance reviews, assesses and approves the scope, risk and frequency of the internal audit services;

(c) The client’s management evaluates the adequacy of the internal audit services and the findings resulting from their performance;

(d) The client’s management evaluates and determines which recommendations resulting from internal audit services to implement and manages the implementation process; and

(e) The client’s management reports to those charged with governance the significant findings and recommendations resulting from the internal audit services.

605.4 A1 Paragraph R600.7 precludes a firm or a network firm from assuming a management responsibility. Performing a significant part of the client’s internal audit activities increases the possibility that firm or network firm personnel providing internal audit services will assume a management responsibility.

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605.4 A2 Examples of internal audit services that involve assuming management responsibilities include:

● Setting internal audit policies or the strategic direction of internal audit activities.

● Directing and taking responsibility for the actions of the entity’s internal audit employees.

● Deciding which recommendations resulting from internal audit activities to implement.

● Reporting the results of the internal audit activities to those charged with governance on behalf of management.

● Performing procedures that form part of the internal control, such as reviewing and approving changes to employee data access privileges.

● Taking responsibility for designing, implementing, monitoring and maintaining internal control.

● Performing outsourced internal audit services, comprising all or a substantial portion of the internal audit function, where the firm or network firm is responsible for determining the scope of the internal audit work; and might have responsibility for one or more of the matters noted above.

605.4 A3 When a firm uses the work of an internal audit function in an audit engagement, ISAs require the performance of procedures to evaluate the adequacy of that work. Similarly, when a firm or network firm accepts an engagement to provide internal audit services to an audit client, the results of those services might be used in conducting the external audit. This creates a self-review threat because it is possible that the audit team will use the results of the internal audit service for purposes of the audit engagement without:

(a) Appropriately evaluating those results; or

(b) Exercising the same level of professional skepticism as would be exercised when the internal audit work is performed by individuals who are not members of the firm.

605.4 A4 Factors that are relevant in evaluating the level of such a self-review threat include:

● The materiality of the related financial statement amounts.

● The risk of misstatement of the assertions related to those financial statement amounts.

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● The degree of reliance that the audit team will place on the work of the internal audit service, including in the course of an external audit.

605.4 A5 An example of an action that might be a safeguard to address such a self-review threat is using professionals who are not audit team members to perform the service.


R605.5 A firm or a network firm shall not provide internal audit services to an audit client that is a public interest entity, if the services relate to:

(a) A significant part of the internal controls over financial reporting;

(b) Financial accounting systems that generate information that is, individually or in the aggregate, material to the client’s accounting records or financial statements on which the firm will express an opinion; or

(c) Amounts or disclosures that are, individually or in the aggregate, material to the financial statements on which the firm will express an opinion.

SUBSECTION 606 – INFORMATION TECHNOLOGY SYSTEMS SERVICES

Introduction606.1 Providing information technology (IT) systems services to an audit

client might create a self-review threat.

606.2 In addition to the specific requirements and application material in this subsection, the requirements and application material in paragraphs 600.1 to R600.10 are relevant to applying the conceptual framework when providing an IT systems service to an audit client. This subsection includes requirements that prohibit firms and network firms from providing certain IT systems services to audit clients in some circumstances because the threats created cannot be addressed by applying safeguards.


606.3 A1 Services related to IT systems include the design or implementation of hardware or software systems. The IT systems might:

(a) Aggregate source data;

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(c) Generate information that affects the accounting records or financial statements, including related disclosures.

However, the IT systems might also involve matters that are unrelated to the audit client’s accounting records or the internal control over financial reporting or financial statements.

606.3 A2 Paragraph R600.7 precludes a firm or a network firm from assuming a management responsibility. Providing the following IT systems services to an audit client does not usually create a threat as long as personnel of the firm or network firm do not assume a management responsibility:

(a) Designing or implementing IT systems that are unrelated to internal control over financial reporting;

(b) Designing or implementing IT systems that do not generate information forming a significant part of the accounting records or financial statements;

(c) Implementing “off-the-shelf” accounting or financial information reporting software that was not developed by the firm or network firm, if the customization required to meet the client’s needs is not significant; and

(d) Evaluating and making recommendations with respect to an IT system designed, implemented or operated by another service provider or the client.

R606.4 When providing IT systems services to an audit client, the firm or network firm shall be satisfied that:

(a) The client acknowledges its responsibility for establishing and monitoring a system of internal controls;

(b) The client assigns the responsibility to make all management decisions with respect to the design and implementation of the hardware or software system to a competent employee, preferably within senior management;

(c) The client makes all management decisions with respect to the design and implementation process;

(d) The client evaluates the adequacy and results of the design and implementation of the system; and

(e) The client is responsible for operating the system (hardware or software) and for the data it uses or generates.

606.4 A1 Factors that are relevant in evaluating the level of a self-review threat created by providing IT systems services to an audit client include:

● The nature of the service. 216

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● The nature of IT systems and the extent to which they impact or interact with the client’s accounting records or financial statements.

● The degree of reliance that will be placed on the particular IT systems as part of the audit.

606.4 A2 An example of an action that might be a safeguard to address such a self-review threat is using professionals who are not audit team members to perform the service.


R606.5 A firm or a network firm shall not provide IT systems services to an audit client that is a public interest entity if the services involve designing or implementing IT systems that:

(a) Form a significant part of the internal control over financial reporting; or

(b) Generate information that is significant to the client’s accounting records or financial statements on which the firm will express an opinion.

SUBSECTION 607 – LITIGATION SUPPORT SERVICES

Introduction607.1 Providing certain litigation support services to an audit client might

create a self-review or advocacy threat.

607.2 In addition to the specific application material in this subsection, the requirements and application material in paragraphs 600.1 to R600.10 are relevant to applying the conceptual framework when providing a litigation support service to an audit client.

Application MaterialAll Audit Clients

607.3 A1 Litigation support services might include activities such as:

● Assisting with document management and retrieval.

● Acting as a witness, including an expert witness.

● Calculating estimated damages or other amounts that might become receivable or payable as the result of litigation or other legal dispute.

607.3 A2 Factors that are relevant in evaluating the level of self-review or advocacy threats created by providing litigation support services to an audit client include: 217

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● The legal and regulatory environment in which the service is provided, for example, whether an expert witness is chosen and appointed by a court.

● The nature and characteristics of the service.

● The extent to which the outcome of the litigation support service will have a material effect on the financial statements on which the firm will express an opinion.

607.3 A3 An example of an action that might be a safeguard to address such a self-review or advocacy threat is using a professional who was not an audit team member to perform the service.

607.3 A4 If a firm or a network firm provides a litigation support service to an audit client and the service involves estimating damages or other amounts that affect the financial statements on which the firm will express an opinion, the requirements and application material set out in Subsection 603 related to valuation services apply.

SUBSECTION 608 – LEGAL SERVICES

Introduction608.1 Providing legal services to an audit client might create a self-review or

advocacy threat.

608.2 In addition to the specific requirements and application material in this subsection, the requirements and application material in paragraphs 600.1 to R600.10 are relevant to applying the conceptual framework when providing a legal service to an audit client. This subsection includes requirements that prohibit firms and network firms from providing certain legal services to audit clients in some circumstances because the threats cannot be addressed by applying safeguards.


608.3 A1 Legal services are defined as any services for which the individual providing the services must either:

(a) Have the required legal training to practice law; or

(b) Be admitted to practice law before the courts of the jurisdiction in which such services are to be provided.

Acting in an Advisory Role

608.4 A1 Depending on the jurisdiction, legal advisory services might include a wide and diversified range of service areas including both corporate and commercial services to audit clients, such as:218

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● Contract support.

● Supporting an audit client in executing a transaction.

● Mergers and acquisitions.

● Supporting and assisting an audit client’s internal legal department.

● Legal due diligence and restructuring.

608.4 A2 Factors that are relevant in evaluating the level of self-review or advocacy threats created by providing legal advisory services to an audit client include:

● The materiality of the specific matter in relation to the client’s financial statements.

● The complexity of the legal matter and the degree of judgment necessary to provide the service.


● Using professionals who are not audit team members to perform the service might address a self-review or advocacy threat.

● Having an appropriate reviewer who was not involved in providing the service review the audit work or the service performed might address a self-review threat.

Acting as General Counsel

R608.5 A partner or employee of the firm or the network firm shall not serve as General Counsel for legal affairs of an audit client.

608.5 A1 The position of General Counsel is usually a senior management position with broad responsibility for the legal affairs of a company.

Acting in an Advocacy Role

R608.6 A firm or a network firm shall not act in an advocacy role for an audit client in resolving a dispute or litigation when the amounts involved are material to the financial statements on which the firm will express an opinion.

608.6 A1 Examples of actions that might be safeguards to address a self-review threat created when acting in an advocacy role for an audit client when the amounts involved are not material to the financial statements on which the firm will express an opinion include:


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● Having an appropriate reviewer who was not involved in providing the service review the audit work or the service performed.

SUBSECTION 609 – RECRUITING SERVICES

Introduction609.1 Providing recruiting services to an audit client might create a self-

interest, familiarity or intimidation threat.

609.2 In addition to the specific requirements and application material in this subsection, the requirements and application material in paragraphs 600.1 to R600.10 are relevant to applying the conceptual framework when providing a recruiting service to an audit client. This subsection includes requirements that prohibit firms and network firms from providing certain types of recruiting services to audit clients in some circumstances because the threats created cannot be addressed by applying safeguards.


609.3 A1 Recruiting services might include activities such as:

● Developing a job description.

● Developing a process for identifying and selecting potential candidates.

● Searching for or seeking out candidates.

● Screening potential candidates for the role by:

○ Reviewing the professional qualifications or competence of applicants and determining their suitability for the position.

○ Undertaking reference checks of prospective candidates.

○ Interviewing and selecting suitable candidates and advising on candidates’ competence.

● Determining employment terms and negotiating details, such as salary, hours and other compensation.

609.3 A2 Paragraph R600.7 precludes a firm or a network firm from assuming a management responsibility. Providing the following services does not usually create a threat as long as personnel of the firm or network firm does not assume a management responsibility:

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● Reviewing the professional qualifications of a number of applicants and providing advice on their suitability for the position.

● Interviewing candidates and advising on a candidate’s competence for financial accounting, administrative or control positions.

R609.4 When a firm or network firm provides recruiting services to an audit client, the firm shall be satisfied that:

(a) The client assigns the responsibility to make all management decisions with respect to hiring the candidate for the position to a competent employee, preferably within senior management; and

(b) The client makes all management decisions with respect to the hiring process, including:

● Determining the suitability of prospective candidates and selecting suitable candidates for the position.

● Determining employment terms and negotiating details, such as salary, hours and other compensation.

609.5 A1 Factors that are relevant in evaluating the level of self-interest, familiarity or intimidation threats created by providing recruiting services to an audit client include:

● The nature of the requested assistance.

● The role of the individual to be recruited.

● Any conflicts of interest or relationships that might exist between the candidates and the firm providing the advice or service.

609.5 A2 An example of an action that might be a safeguard to address such a self-interest, familiarity or intimidation threat is using professionals who are not audit team members to perform the service.

Recruiting Services that are Prohibited

R609.6 When providing recruiting services to an audit client, the firm or the network firm shall not act as a negotiator on the client’s behalf.

R609.7 A firm or a network firm shall not provide a recruiting service to an audit client if the service relates to:

(a) Searching for or seeking out candidates; or

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with respect to the following positions:

(i) A director or officer of the entity; or

(ii) A member of senior management in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion.

SUBSECTION 610 – CORPORATE FINANCE SERVICES

Introduction610.1 Providing corporate finance services to an audit client might create a

self-review or advocacy threat.

610.2 In addition to the specific requirements and application material in this subsection, the requirements and application material in paragraphs 600.1 to R600.10 are relevant to applying the conceptual framework when providing a corporate finance service to an audit client. This subsection includes requirements that prohibit firms and network firms from providing certain corporate finance services in some circumstances to audit clients because the threats created cannot be addressed by applying safeguards.


610.3 A1 Examples of corporate finance services that might create a self-review or advocacy threat include:

● Assisting an audit client in developing corporate strategies.

● Identifying possible targets for the audit client to acquire.

● Advising on disposal transactions.

● Assisting in finance raising transactions.

● Providing structuring advice.

● Providing advice on the structuring of a corporate finance transaction or on financing arrangements that will directly affect amounts that will be reported in the financial statements on which the firm will express an opinion.

610.3 A2 Factors that are relevant in evaluating the level of such threats created by providing corporate finance services to an audit client include:

● The degree of subjectivity involved in determining the appropriate treatment for the outcome or consequences of the corporate finance advice in the financial statements.222

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● The extent to which:

○ The outcome of the corporate finance advice will directly affect amounts recorded in the financial statements.

○ The amounts are material to the financial statements.

● Whether the effectiveness of the corporate finance advice depends on a particular accounting treatment or presentation in the financial statements and there is doubt as to the appropriateness of the related accounting treatment or presentation under the relevant financial reporting framework.




Corporate Finance Services that are Prohibited

R610.4 A firm or a network firm shall not provide corporate finance services to an audit client that involve promoting, dealing in, or underwriting the audit client’s shares.

R610.5 A firm or a network firm shall not provide corporate finance advice to an audit client where the effectiveness of such advice depends on a particular accounting treatment or presentation in the financial statements on which the firm will express an opinion and:

(a) The audit team has reasonable doubt as to the appropriateness of the related accounting treatment or presentation under the relevant financial reporting framework; and

(b) The outcome or consequences of the corporate finance advice will have a material effect on the financial statements on which the firm will express an opinion.

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SECTION 800

REPORTS ON SPECIAL PURPOSE FINANCIAL STATEMENTS THAT INCLUDE A RESTRICTION ON USE AND DISTRIBUTION (AUDIT AND REVIEW ENGAGEMENTS)



800.2 This section sets out certain modifications to Part 4A which are permitted in certain circumstances involving audits of special purpose financial statements where the report includes a restriction on use and distribution. In this section, an engagement to issue a restricted use and distribution report in the circumstances set out in paragraph R800.3 is referred to as an “eligible audit engagement.”


R800.3 When a firm intends to issue a report on an audit of special purpose financial statements which includes a restriction on use and distribution, the independence requirements set out in Part 4A shall be eligible for the modifications that are permitted by this section, but only if:

(a) The firm communicates with the intended users of the report regarding the modified independence requirements that are to be applied in providing the service; and

(b) The intended users of the report understand the purpose and limitations of the report and explicitly agree to the application of the modifications.

800.3 A1 The intended users of the report might obtain an understanding of the purpose and limitations of the report by participating, either directly, or indirectly through a representative who has authority to act for the intended users, in establishing the nature and scope of the engagement. In either case, this participation helps the firm to communicate with intended users about independence matters, including the circumstances that are relevant to applying the conceptual framework. It also allows the firm to obtain the agreement of the intended users to the modified independence requirements.

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R800.4 Where the intended users are a class of users who are not specifically identifiable by name at the time the engagement terms are established, the firm shall subsequently make such users aware of the modified independence requirements agreed to by their representative.

800.4 A1 For example, where the intended users are a class of users such as lenders in a syndicated loan arrangement, the firm might describe the modified independence requirements in an engagement letter to the representative of the lenders. The representative might then make the firm’s engagement letter available to the members of the group of lenders to meet the requirement for the firm to make such users aware of the modified independence requirements agreed to by the representative.

R800.5 When the firm performs an eligible audit engagement, any modifications to Part 4A shall be limited to those set out in paragraphs R800.7 to R800.14. The firm shall not apply these modifications when an audit of financial statements is required by law or regulation.

R800.6 If the firm also issues an audit report that does not include a restriction on use and distribution for the same client, the firm shall apply Part 4A to that audit engagement.

Public Interest Entities

R800.7 When the firm performs an eligible audit engagement, the firm does not need to apply the independence requirements set out in Part 4A that apply only to public interest entity audit engagements.

Related Entities

R800.8 When the firm performs an eligible audit engagement, references to “audit client” in Part 4A do not need to include its related entities. However, when the audit team knows or has reason to believe that a relationship or circumstance involving a related entity of the client is relevant to the evaluation of the firm’s independence of the client, the audit team shall include that related entity when identifying, evaluating and addressing threats to independence.

Networks and Network Firms

R800.9 When the firm performs an eligible audit engagement, the specific requirements regarding network firms set out in Part 4A do not need to be applied. However, when the firm knows or has reason to believe that threats to independence are created by any interests and relationships of a network firm, the firm shall evaluate and address any such threat.

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Financial Interests, Loans and Guarantees, Close Business Relationships, and Family and Personal Relationships

R800.10 When the firm performs an eligible audit engagement:

(a) The relevant provisions set out in Sections 510, 511, 520, 521, 522, 524 and 525 need apply only to the members of the engagement team, their immediate family members and, where applicable, close family members;

(b) The firm shall identify, evaluate and address any threats to independence created by interests and relationships, as set out in Sections 510, 511, 520, 521, 522, 524 and 525, between the audit client and the following audit team members:

(i) Those who provide consultation regarding technical or industry specific issues, transactions or events; and

(ii) Those who provide quality control for the engagement, including those who perform the engagement quality control review; and

(c) The firm shall evaluate and address any threats that the engagement team has reason to believe are created by interests and relationships between the audit client and others within the firm who can directly influence the outcome of the audit engagement.

800.10 A1 Others within a firm who can directly influence the outcome of the audit engagement include those who recommend the compensation, or who provide direct supervisory, management or other oversight, of the audit engagement partner in connection with the performance of the audit engagement including those at all successively senior levels above the engagement partner through to the individual who is the firm’s Senior or Managing Partner (Chief Executive or equivalent).

R800.11 When the firm performs an eligible audit engagement, the firm shall evaluate and address any threats that the engagement team has reason to believe are created by financial interests in the audit client held by individuals, as set out in paragraphs R510.4(c) and (d), R510.5, R510.7 and 510.10 A5 and A9.

R800.12 When the firm performs an eligible audit engagement, the firm, in applying the provisions set out in paragraphs R510.4(a), R510.6 and R510.7 to interests of the firm, shall not hold a material direct or a material indirect financial interest in the audit client.

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Employment with an Audit Client

R800.13 When the firm performs an eligible audit engagement, the firm shall evaluate and address any threats created by any employment relationships as set out in paragraphs 524.3 A1 to 524.5 A3.

Providing Non-Assurance Services

R800.14 If the firm performs an eligible audit engagement and provides a non-assurance service to the audit client, the firm shall comply with Sections 410 to 430 and Section 600, including its subsections, subject to paragraphs R800.7 to R800.9.

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Page

Section 900 Applying the Conceptual Framework to Independence for Assurance Engagements Other than Audit and Review Engagements ............................................................................. 198

Section 905 Fees ........................................................................................... 206

Section 906 Gifts and Hospitality ................................................................. 209

Section 907 Actual or Threatened Litigation ................................................ 210

Section 910 Financial Interests ..................................................................... 211

Section 911 Loans and Guarantees ............................................................... 215

Section 920 Business Relationships.............................................................. 217

Section 921 Family and Personal Relationships ........................................... 219

Section 922 Recent Service with an Assurance Client ................................. 222

Section 923 Serving as a Director or Officer of an Assurance Client ........... 223

Section 924 Employment With an Assurance Client .................................... 224

Section 940 Long Association of Personnel with an Assurance Client ........ 226

Section 950 Provision of Non-assurance Services to Assurance Clients Other than Audit and Review Engagement Clients .................. 228

Section 990 Reports that Include a Restriction on Use and Distribution (Assurance Engagements Other than Audit and Review Engagements) ............................................................................ 232

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PART 4B – INDEPENDENCE FOR ASSURANCE ENGAGEMENTS OTHER THAN AUDIT AND REVIEW ENGAGEMENTS

SECTION 900

APPLYING THE CONCEPTUAL FRAMEWORK TO INDEPENDENCE FOR ASSURANCE ENGAGEMENTS OTHER THAN AUDIT AND REVIEW ENGAGEMENTS

IntroductionGeneral

900.1 This Part applies to assurance engagements other than audit and review engagements (referred to as “assurance engagements” in this Part). Examples of such engagements include:

● An audit of specific elements, accounts or items of a financial statement.

● Performance assurance on a company’s key performance indicators.


900.3 ISQC 1 requires a firm to establish policies and procedures designed to provide it with reasonable assurance that the firm, its personnel and, where applicable, others subject to independence requirements maintain independence where required by relevant ethics standards. ISAEs establish responsibilities for engagement partners and engagement teams at the level of the engagement. The allocation of responsibilities within a firm will depend on its size, structure and organization. Many of the provisions of Part 4B do not prescribe the specific responsibility of individuals within the firm for actions related to independence, instead referring to “firm” for ease of reference. Firms assign responsibility for a particular action to an individual or a group of individuals (such as an assurance team) in accordance with ISQC 1. In addition, an individual professional accountant remains responsible for compliance with any provisions that apply to that accountant’s activities, interests or relationships.

900.4 Independence is linked to the principles of objectivity and integrity. It comprises:

(a) Independence of mind – the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity, and exercise objectivity and professional skepticism.229

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(b) Independence in appearance – the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude that a firm’s or an assurance team member’s integrity, objectivity or professional skepticism has been compromised.

In this Part, references to an individual or firm being “independent” mean that the individual or firm has complied with the provisions of this Part.

900.5 When performing assurance engagements, the Code requires firms to comply with the fundamental principles and be independent. This Part sets out specific requirements and application material on how to apply the conceptual framework to maintain independence when performing such engagements. The conceptual framework set out in Section 120 applies to independence as it does to the fundamental principles set out in Section 110.

900.6 This Part describes:

(a) Facts and circumstances, including professional activities, interests and relationships, that create or might create threats to independence;

(b) Potential actions, including safeguards, that might be appropriate to address any such threats; and

(c) Some situations where the threats cannot be eliminated or there can be no safeguards to reduce the threats to an acceptable level.

Description of Other Assurance Engagements

900.7 Assurance engagements are designed to enhance intended users’ degree of confidence about the outcome of the evaluation or measurement of a subject matter against criteria. In an assurance engagement, the firm expresses a conclusion designed to enhance the degree of confidence of the intended users (other than the responsible party) about the outcome of the evaluation or measurement of a subject matter against criteria. The Assurance Framework describes the elements and objectives of an assurance engagement and identifies engagements to which ISAEs apply. For a description of the elements and objectives of an assurance engagement, refer to the Assurance Framework.

900.8 The outcome of the evaluation or measurement of a subject matter is the information that results from applying the criteria to the subject matter. The term “subject matter information” is used to mean the outcome of the evaluation or measurement of a subject matter. For example, the Assurance Framework states that an assertion about the effectiveness of internal control (subject matter information) results from applying a framework for evaluating the effectiveness of internal control, such as COSO or CoCo (criteria), to internal control, a process (subject matter).230

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900.9 Assurance engagements might be assertion-based or direct reporting. In either case, they involve three separate parties: a firm, a responsible party and intended users.

900.10 In an assertion-based assurance engagement, the evaluation or measurement of the subject matter is performed by the responsible party. The subject matter information is in the form of an assertion by the responsible party that is made available to the intended users.

900.11 In a direct reporting assurance engagement, the firm:

(a) Directly performs the evaluation or measurement of the subject matter; or

(b) Obtains a representation from the responsible party that has performed the evaluation or measurement that is not available to the intended users. The subject matter information is provided to the intended users in the assurance report.

Reports that Include a Restriction on Use and Distribution

900.12 An assurance report might include a restriction on use and distribution. If it does and the conditions set out in Section 990 are met, then the independence requirements in this Part may be modified as provided in Section 990.

Audit and Review Engagements

900.13 Independence standards for audit and review engagements are set out in Part 4A – Independence for Audit and Review Engagements. If a firm performs both an assurance engagement and an audit or review engagement for the same client, the requirements in Part 4A continue to apply to the firm, a network firm and the audit or review team members.


R900.14 A firm performing an assurance engagement shall be independent.

R900.15 A firm shall apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to independence in relation to an assurance engagement.

Network firms

R900.16 When a firm has reason to believe that interests and relationships of a network firm create a threat to the firm’s independence, the firm shall evaluate and address any such threat.

900.16 A1 Network firms are discussed in paragraphs 400.50 A1 to 400.54 A1.

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Related Entities

R900.17 When the assurance team knows or has reason to believe that a relationship or circumstance involving a related entity of the assurance client is relevant to the evaluation of the firm’s independence from the client, the assurance team shall include that related entity when identifying, evaluating and addressing threats to independence.

Types of Assurance Engagements

Assertion-based Assurance Engagements

R900.18 When performing an assertion-based assurance engagement:

(a) The assurance team members and the firm shall be independent of the assurance client (the party responsible for the subject matter information, and which might be responsible for the subject matter) as set out in this Part. The independence requirements set out in this Part prohibit certain relationships between assurance team members and (i) directors or officers, and (ii) individuals at the client in a position to exert significant influence over the subject matter information;

(b) The firm shall apply the conceptual framework set out in Section 120 to relationships with individuals at the client in a position to exert significant influence over the subject matter of the engagement; and

(c) The firm shall evaluate and address any threats that the firm has reason to believe are created by network firm interests and relationships.

R900.19 When performing an assertion-based assurance engagement where the responsible party is responsible for the subject matter information but not the subject matter:

(a) The assurance team members and the firm shall be independent of the party responsible for the subject matter information (the assurance client); and

(b) The firm shall evaluate and address any threats the firm has reason to believe are created by interests and relationships between an assurance team member, the firm, a network firm and the party responsible for the subject matter.

900.19 A1 In the majority of assertion-based assurance engagements, the responsible party is responsible for both the subject matter information and the subject matter. However, in some engagements, the responsible party might not be responsible for the subject matter. An example might be when a firm is engaged to perform an assurance engagement

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regarding a report that an environmental consultant has prepared about a company’s sustainability practices for distribution to intended users. In this case, the environmental consultant is the responsible party for the subject matter information but the company is responsible for the subject matter (the sustainability practices).

Direct Reporting Assurance Engagements

R900.20 When performing a direct reporting assurance engagement:

(a) The assurance team members and the firm shall be independent of the assurance client (the party responsible for the subject matter); and

(b) The firm shall evaluate and address any threats to independence the firm has reason to believe are created by network firm interests and relationships.

Multiple Responsible Parties

900.21 A1 In some assurance engagements, whether assertion-based or direct reporting, there might be several responsible parties. In determining whether it is necessary to apply the provisions in this Part to each responsible party in such engagements, the firm may take into account certain matters. These matters include whether an interest or relationship between the firm, or an assurance team member, and a particular responsible party would create a threat to independence that is not trivial and inconsequential in the context of the subject matter information. This determination will take into account factors such as:

(a) The materiality of the subject matter information (or of the subject matter) for which the particular responsible party is responsible.

(b) The degree of public interest associated with the engagement.

If the firm determines that the threat created by any such interest or relationship with a particular responsible party would be trivial and inconsequential, it might not be necessary to apply all of the provisions of this section to that responsible party.


Period During which Independence is Required

R900.30 Independence, as required by this Part, shall be maintained during both:

(a) The engagement period; and

(b) The period covered by the subject matter information.

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900.30 A1 The engagement period starts when the assurance team begins to perform assurance services with respect to the particular engagement. The engagement period ends when the assurance report is issued. When the engagement is of a recurring nature, it ends at the later of the notification by either party that the professional relationship has ended or the issuance of the final assurance report.

R900.31 If an entity becomes an assurance client during or after the period covered by the subject matter information on which the firm will express a conclusion, the firm shall determine whether any threats to independence are created by:

(a) Financial or business relationships with the assurance client during or after the period covered by the subject matter information but before accepting the assurance engagement; or

(b) Previous services provided to the assurance client.

R900.32 Threats to independence are created if a non-assurance service was provided to the assurance client during, or after the period covered by the subject matter information, but before the assurance team begins to perform assurance services, and the service would not be permitted during the engagement period. In such circumstances, the firm shall evaluate and address any threat to independence created by the service. If the threats are not at an acceptable level, the firm shall only accept the assurance engagement if the threats are reduced to an acceptable level.


● Using professionals who are not assurance team members to perform the service.

● Having an appropriate reviewer review the assurance and non-assurance work as appropriate.

R900.33 If a non-assurance service that would not be permitted during the engagement period has not been completed and it is not practical to complete or end the service before the commencement of professional services in connection with the assurance engagement, the firm shall only accept the assurance engagement if:

(a) The firm is satisfied that:

(i) The non-assurance service will be completed within a short period of time; or

(ii) The client has arrangements in place to transition the service to another provider within a short period of time;

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(b) The firm applies safeguards when necessary during the service period; and

(c) The firm discusses the matter with those charged with governance.


General Documentation of Independence for Assurance Engagements Other than Audit and Review Engagements

R900.40 A firm shall document conclusions regarding compliance with this Part, and the substance of any relevant discussions that support those conclusions. In particular:

(a) When safeguards are applied to address a threat, the firm shall document the nature of the threat and the safeguards in place or applied; and

(b) When a threat required significant analysis and the firm concluded that the threat was already at an acceptable level, the firm shall document the nature of the threat and the rationale for the conclusion.

900.40 A1 Documentation provides evidence of the firm’s judgments in forming conclusions regarding compliance with this Part. However, a lack of documentation does not determine whether a firm considered a particular matter or whether the firm is independent.


Breach of an Independence Provision for Assurance Engagements Other than Audit and Review Engagements

When a Firm Identifies a Breach

R900.50 If a firm concludes that a breach of a requirement in this Part has occurred, the firm shall:

(a) End, suspend or eliminate the interest or relationship that created the breach;

(b) Evaluate the significance of the breach and its impact on the firm’s objectivity and ability to issue an assurance report; and

(c) Determine whether action can be taken that satisfactorily addresses the consequences of the breach.

In making this determination, the firm shall exercise professional judgment and take into account whether a reasonable and informed third party would be likely to conclude that the firm’s objectivity would

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be compromised, and therefore, the firm would be unable to issue an assurance report.

R900.51 If the firm determines that action cannot be taken to address the consequences of the breach satisfactorily, the firm shall, as soon as possible, inform the party that engaged the firm or those charged with governance, as appropriate. The firm shall also take the steps necessary to end the assurance engagement in compliance with any applicable legal or regulatory requirements relevant to ending the assurance engagement.

R900.52 If the firm determines that action can be taken to address the consequences of the breach satisfactorily, the firm shall discuss the breach and the action it has taken or proposes to take with the party that engaged the firm or those charged with governance, as appropriate. The firm shall discuss the breach and the proposed action on a timely basis, taking into account the circumstances of the engagement and the breach.

R900.53 If the party that engaged the firm does not, or those charged with governance do not concur that the action proposed by the firm in accordance with paragraph R900.50(c) satisfactorily addresses the consequences of the breach, the firm shall take the steps necessary to end the assurance engagement in compliance with any applicable legal or regulatory requirements relevant to ending the assurance engagement.

Documentation

R900.54 In complying with the requirements in paragraphs R900.50 to R900.53, the firm shall document:

(a) The breach;

(b) The actions taken;

(c) The key decisions made; and

(d) All the matters discussed with the party that engaged the firm or those charged with governance.

R900.55 If the firm continues with the assurance engagement, it shall document:

(a) The conclusion that, in the firm’s professional judgment, objectivity has not been compromised; and

(b) The rationale for why the action taken satisfactorily addressed the consequences of the breach so that the firm could issue an assurance report.

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SECTION 905

FEES



905.2 The nature and level of fees or other types of remuneration might create a self-interest or intimidation threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application MaterialFees―Relative Size

905.3 A1 When the total fees generated from an assurance client by the firm expressing the conclusion in an assurance engagement represent a large proportion of the total fees of that firm, the dependence on that client and concern about losing the client create a self-interest or intimidation threat.


● The operating structure of the firm.

● Whether the firm is well established or new.

● The significance of the client qualitatively and/or quantitatively to the firm.

905.3 A3 An example of an action that might be a safeguard to address such a self-interest or intimidation threat is increasing the client base in the firm to reduce dependence on the assurance client.

905.3 A4 A self-interest or intimidation threat is also created when the fees generated by the firm from an assurance client represent a large proportion of the revenue from an individual partner’s clients.

905.3 A5 Examples of actions that might be safeguards to address such a self-interest or intimidation threat include:

● Increasing the client base of the partner to reduce dependence on the assurance client.

● Having an appropriate reviewer who was not an assurance team member review the work.

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Fees―Overdue

905.4 A1 A self-interest threat might be created if a significant part of fees is not paid before the assurance report, if any, for the following period is issued. It is generally expected that the firm will require payment of such fees before any such report is issued. The requirements and application material set out in Section 911 with respect to loans and guarantees might also apply to situations where such unpaid fees exist.


● Obtaining partial payment of overdue fees.

● Having an appropriate reviewer who did not take part in the assurance engagement review the work performed.

R905.5 When a significant part of fees due from an assurance client remains unpaid for a long time, the firm shall determine:

(a) Whether the overdue fees might be equivalent to a loan to the client; and

(b) Whether it is appropriate for the firm to be re-appointed or continue the assurance engagement.

Contingent Fees

905.6 A1 Contingent fees are fees calculated on a predetermined basis relating to the outcome of a transaction or the result of the services performed. A contingent fee charged through an intermediary is an example of an indirect contingent fee. In this section, a fee is not regarded as being contingent if established by a court or other public authority.

R905.7 A firm shall not charge directly or indirectly a contingent fee for an assurance engagement.

R905.8 A firm shall not charge directly or indirectly a contingent fee for a non-assurance service provided to an assurance client if the outcome of the non-assurance service, and therefore, the amount of the fee, is dependent on a future or contemporary judgment related to a matter that is material to the subject matter information of the assurance engagement.

905.9 A1 Paragraphs R905.7 and R905.8 preclude a firm from entering into certain contingent fee arrangements with an assurance client. Even if a contingent fee arrangement is not precluded when providing a non-assurance service to an assurance client, a self-interest threat might still be created.

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● Whether an appropriate authority determines the outcome on which the contingent fee depends.

● Disclosure to intended users of the work performed by the firm and the basis of remuneration.

● The nature of the service.

● The effect of the event or transaction on the subject matter information.


● Having an appropriate reviewer who was not involved in performing the non-assurance service review the relevant assurance work.


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SECTION 906

GIFTS AND HOSPITALITY



906.2 Accepting gifts and hospitality from an assurance client might create a self-interest, familiarity or intimidation threat. This section sets out a specific requirement and application material relevant to applying the conceptual framework in such circumstances.

Requirement and Application MaterialR906.3 A firm or an assurance team member shall not accept gifts and hospitality

from an assurance client, unless the value is trivial and inconsequential.

906.3 A1 Where a firm or assurance team member is offering or accepting an inducement to or from an assurance client, the requirements and application material set out in Section 340 apply and non-compliance with these requirements might create threats to independence.

906.3 A2 The requirements set out in Section 340 relating to offering or accepting inducements do not allow a firm or assurance team member to accept gifts and hospitality where the intent is to improperly influence behavior even if the value is trivial and inconsequential.

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SECTION 907

SECTION 907

ACTUAL OR THREATENED LITIGATION



907.2 When litigation with an assurance client occurs, or appears likely, self-interest and intimidation threats are created. This section sets out specific application material relevant to applying the conceptual framework in such circumstances.

Application MaterialGeneral

907.3 A1 The relationship between client management and assurance team members must be characterized by complete candor and full disclosure regarding all aspects of a client’s operations. Adversarial positions might result from actual or threatened litigation between an assurance client and the firm or an assurance team member. Such adversarial positions might affect management’s willingness to make complete disclosures and create self-interest and intimidation threats.


● The materiality of the litigation.

● Whether the litigation relates to a prior assurance engagement.

907.3 A3 If the litigation involves an assurance team member, an example of an action that might eliminate such self-interest and intimidation threats is removing that individual from the assurance team.

907.3 A4 An example of an action that might be a safeguard to address such self-interest and intimidation threats is having an appropriate reviewer review the work performed.

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SECTION 910

FINANCIAL INTERESTS



910.2 Holding a financial interest in an assurance client might create a self-interest threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application Material

General

910.3 A1 A financial interest might be held directly or indirectly through an intermediary such as a collective investment vehicle, an estate or a trust. When a beneficial owner has control over the intermediary or ability to influence its investment decisions, the Code defines that financial interest to be direct. Conversely, when a beneficial owner has no control over the intermediary or ability to influence its investment decisions, the Code defines that financial interest to be indirect.

910.3 A2 This section contains references to the “materiality” of a financial interest. In determining whether such an interest is material to an individual, the combined net worth of the individual and the individual’s immediate family members may be taken into account.

910.3 A3 Factors that are relevant in evaluating the level of a self-interest threat created by holding a financial interest in an assurance client include:

● The role of the individual holding the financial interest.



Financial Interests Held by the Firm, Assurance Team Members and Immediate Family

R910.4 A direct financial interest or a material indirect financial interest in the assurance client shall not be held by:

(a) The firm; or

(b) An assurance team member or any of that individual’s immediate family.

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Financial Interests in an Entity Controlling an Assurance Client

R910.5 When an entity has a controlling interest in the assurance client and the client is material to the entity, neither the firm, nor an assurance team member, nor any of that individual’s immediate family shall hold a direct or material indirect financial interest in that entity.

Financial Interests Held as Trustee

R910.6 Paragraph R910.4 shall also apply to a financial interest in an assurance client held in a trust for which the firm or individual acts as trustee unless:

(a) None of the following is a beneficiary of the trust: the trustee, the assurance team member or any of that individual’s immediate family, or the firm;

(b) The interest in the assurance client held by the trust is not material to the trust;

(c) The trust is not able to exercise significant influence over the assurance client; and

(d) None of the following can significantly influence any investment decision involving a financial interest in the assurance client: the trustee, the assurance team member or any of that individual’s immediate family, or the firm.

Financial Interests Received Unintentionally

R910.7 If a firm, an assurance team member, or any of that individual’s immediate family, receives a direct financial interest or a material indirect financial interest in an assurance client by way of an inheritance, gift, as a result of a merger, or in similar circumstances and the interest would not otherwise be permitted to be held under this section, then:

(a) If the interest is received by the firm, the financial interest shall be disposed of immediately, or enough of an indirect financial interest shall be disposed of so that the remaining interest is no longer material; or

(b) If the interest is received by an assurance team member, or by any of that individual’s immediate family, the individual who received the financial interest shall immediately dispose of the financial interest, or dispose of enough of an indirect financial interest so that the remaining interest is no longer material.

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Financial Interests – Other Circumstances

Close Family

910.8 A1 A self-interest threat might be created if an assurance team member knows that a close family member has a direct financial interest or a material indirect financial interest in the assurance client.


● The nature of the relationship between the assurance team member and the close family member.


● The materiality of the financial interest to the close family member.


● Having the close family member dispose, as soon as practicable, of all of the financial interest or dispose of enough of an indirect financial interest so that the remaining interest is no longer material.

● Removing the individual from the assurance team.

910.8 A4 An example of an action that might be a safeguard to address such a self-interest threat is having an appropriate reviewer review the work of the assurance team member.

Other Individuals

910.8 A5 A self-interest threat might be created if an assurance team member knows that a financial interest is held in the assurance client by individuals such as:

● Partners and professional employees of the firm, apart from those who are specifically not permitted to hold such financial interests by paragraph R910.4, or their immediate family members.

● Individuals with a close personal relationship with an assurance team member.

910.8 A6 An example of an action that might eliminate such a self-interest threat is removing the assurance team member with the personal relationship from the assurance team.


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● Excluding the assurance team member from any significant decision-making concerning the assurance engagement.

● Having an appropriate reviewer review the work of the assurance team member.

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SECTION 911

LOANS AND GUARANTEES



911.2 A loan or a guarantee of a loan with an assurance client might create a self-interest threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.


911.3 A1 This section contains references to the “materiality” of a loan or guarantee. In determining whether such a loan or guarantee is material to an individual, the combined net worth of the individual and the individual’s immediate family members may be taken into account.

Loans and Guarantees with an Assurance Client

R911.4 A firm, an assurance team member, or any of that individual’s immediate family shall not make or guarantee a loan to an assurance client unless the loan or guarantee is immaterial to both:

(a) The firm or the individual making the loan or guarantee, as applicable; and

(b) The client.

Loans and Guarantees with an Assurance Client that is a Bank or Similar Institution

R911.5 A firm, an assurance team member, or any of that individual’s immediate family shall not accept a loan, or a guarantee of a loan, from an assurance client that is a bank or a similar institution unless the loan or guarantee is made under normal lending procedures, terms and conditions.

911.5 A1 Examples of loans include mortgages, bank overdrafts, car loans and credit card balances.

911.5 A2 Even if a firm receives a loan from an assurance client that is a bank or similar institution under normal lending procedures, terms and conditions, the loan might create a self-interest threat if it is material to the assurance client or firm receiving the loan.

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911.5 A3 An example of an action that might be a safeguard to address such a self-interest threat is having the work reviewed by an appropriate reviewer, who is not an assurance team member, from a network firm that is not a beneficiary of the loan.

Deposit or Brokerage Accounts

R911.6 A firm, an assurance team member, or any of that individual’s immediate family shall not have deposits or a brokerage account with an assurance client that is a bank, broker, or similar institution, unless the deposit or account is held under normal commercial terms.

Loans and Guarantees with an Assurance Client that is not a Bank or Similar Institution

R911.7 A firm or an assurance team member, or any of that individual’s immediate family, shall not accept a loan from, or have a borrowing guaranteed by, an assurance client that is not a bank or similar institution, unless the loan or guarantee is immaterial to both:

(a) The firm, or the individual receiving the loan or guarantee, as applicable; and

(b) The client.

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SECTION 920

BUSINESS RELATIONSHIPS



920.2 A close business relationship with an assurance client or its management might create a self-interest or intimidation threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.


920.3 A1 This section contains references to the “materiality” of a financial interest and the “significance” of a business relationship. In determining whether such a financial interest is material to an individual, the combined net worth of the individual and the individual’s immediate family members may be taken into account.

920.3 A2 Examples of a close business relationship arising from a commercial relationship or common financial interest include:

● Having a financial interest in a joint venture with either the client or a controlling owner, director or officer or other individual who performs senior managerial activities for that client.

● Arrangements to combine one or more services or products of the firm with one or more services or products of the client and to market the package with reference to both parties.

● Distribution or marketing arrangements under which the firm distributes or markets the client’s products or services, or the client distributes or markets the firm’s products or services.

Firm, Assurance Team Member or Immediate Family Business Relationships

R920.4 A firm or an assurance team member shall not have a close business relationship with an assurance client or its management unless any financial interest is immaterial and the business relationship is insignificant to the client or its management and the firm or the assurance team member, as applicable.

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920.4 A1 A self-interest or intimidation threat might be created if there is a close business relationship between the assurance client or its management and the immediate family of an assurance team member.

Buying Goods or Services

920.5 A1 The purchase of goods and services from an assurance client by a firm, or an assurance team member, or any of that individual’s immediate family does not usually create a threat to independence if the transaction is in the normal course of business and at arm’s length. However, such transactions might be of such a nature and magnitude that they create a self-interest threat.


● Eliminating or reducing the magnitude of the transaction.

● Removing the individual from the assurance team.

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SECTION 921

FAMILY AND PERSONAL RELATIONSHIPS



921.2 Family or personal relationships with client personnel might create a self-interest, familiarity or intimidation threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.


921.3 A1 A self-interest, familiarity or intimidation threat might be created by family and personal relationships between an assurance team member and a director or officer or, depending on their role, certain employees of the assurance client.


● The individual’s responsibilities on the assurance team.

● The role of the family member or other individual within the client, and the closeness of the relationship.

Immediate Family of an Assurance Team Member

921.4 A1 A self-interest, familiarity or intimidation threat is created when an immediate family member of an assurance team member is an employee in a position to exert significant influence over the subject matter of the engagement.


● The position held by the immediate family member.

● The role of the assurance team member.

921.4 A3 An example of an action that might eliminate such a self-interest, familiarity or intimidation threat is removing the individual from the assurance team.

921.4 A4 An example of an action that might be a safeguard to address such a self-interest, familiarity or intimidation threat is structuring the responsibilities of the assurance team so that the assurance team

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member does not deal with matters that are within the responsibility of the immediate family member.

R921.5 An individual shall not participate as an assurance team member when any of that individual’s immediate family:

(a) Is a director or officer of the assurance client;

(b) Is an employee in a position to exert significant influence over the subject matter information of the assurance engagement; or

(c) Was in such a position during any period covered by the engagement or the subject matter information.

Close Family of an Assurance Team Member

921.6 A1 A self-interest, familiarity or intimidation threat is created when a close family member of an assurance team member is:

(a) A director or officer of the assurance client; or

(b) An employee in a position to exert significant influence over the subject matter information of the assurance engagement.


● The nature of the relationship between the assurance team member and the close family member.

● The position held by the close family member.



921.6 A4 An example of an action that might be a safeguard to address such a self-interest, familiarity or intimidation threat is structuring the responsibilities of the assurance team so that the assurance team member does not deal with matters that are within the responsibility of the close family member.

Other Close Relationships of an Assurance Team Member

R921.7 An assurance team member shall consult in accordance with firm policies and procedures if the assurance team member has a close relationship with an individual who is not an immediate or close family member, but who is:

(a) A director or officer of the assurance client; or

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921.7 A1 Factors that are relevant in evaluating the level of a self-interest, familiarity or intimidation threat created by such relationships include:

● The nature of the relationship between the individual and the assurance team member.




921.7 A3 An example of an action that might be a safeguard to address such a self-interest, familiarity or intimidation threat is structuring the responsibilities of the assurance team so that the assurance team member does not deal with matters that are within the responsibility of the individual with whom the assurance team member has a close relationship.

Relationships of Partners and Employees of the Firm

921.8 A1 A self-interest, familiarity or intimidation threat might be created by a personal or family relationship between:

(a) A partner or employee of the firm who is not an assurance team member; and

(b) A director or officer of the assurance client or an employee in a position to exert significant influence over the subject matter information of the assurance engagement.


● The nature of the relationship between the partner or employee of the firm and the director or officer or employee of the client.

● The degree of interaction of the partner or employee of the firm with the assurance team.

● The position of the partner or employee within the firm.

● The role of the individual within the client.

921.8 A3 Examples of actions that might be safeguards to address such self-interest, familiarity or intimidation threats include:

● Structuring the partner’s or employee’s responsibilities to reduce any potential influence over the assurance engagement.

● Having an appropriate reviewer review the relevant assurance work performed.

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SECTION 922

RECENT SERVICE WITH AN ASSURANCE CLIENT



922.2 If an assurance team member has recently served as a director or officer or employee of the assurance client, a self-interest, self-review or familiarity threat might be created . This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application MaterialService During the Period Covered by the Assurance Report

R922.3 The assurance team shall not include an individual who, during the period covered by the assurance report:

(a) Had served as a director or officer of the assurance client; or

(b) Was an employee in a position to exert significant influence over the subject matter information of the assurance engagement.

Service Prior to the Period Covered by the Assurance Report

922.4 A1 A self-interest, self-review or familiarity threat might be created if, before the period covered by the assurance report, an assurance team member:

(a) Had served as a director or officer of the assurance client; or

(b) Was an employee in a position to exert significant influence over the subject matter information of the assurance engagement.

For example, a threat would be created if a decision made or work performed by the individual in the prior period, while employed by the client, is to be evaluated in the current period as part of the current assurance engagement.


● The position the individual held with the client.

● The length of time since the individual left the client.


922.4 A3 An example of an action that might be a safeguard to address such a self-interest, self-review or familiarity threat is having an appropriate reviewer review the work performed by the assurance team member.253

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SECTION 923

SERVING AS A DIRECTOR OR OFFICER OF AN ASSURANCE CLIENT



923.2 Serving as a director or officer of an assurance client creates self-review and self-interest threats. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application Material Service as Director or Officer

R923.3 A partner or employee of the firm shall not serve as a director or officer of an assurance client of the firm.

Service as Company Secretary

R923.4 A partner or employee of the firm shall not serve as Company Secretary for an assurance client of the firm unless:

(a) This practice is specifically permitted under local law, professional rules or practice;

(b) Management makes all decisions; and

(c) The duties and activities performed are limited to those of a routine and administrative nature, such as preparing minutes and maintaining statutory returns.

923.4 A1 The position of Company Secretary has different implications in different jurisdictions. Duties might range from: administrative duties (such as personnel management and the maintenance of company records and registers) to duties as diverse as ensuring that the company complies with regulations or providing advice on corporate governance matters. Usually this position is seen to imply a close association with the entity. Therefore, a threat is created if a partner or employee of the firm serves as Company Secretary for an assurance client. (More information on providing non-assurance services to an assurance client is set out in Section 950, Provision of Non-assurances Services to an Assurance Client.)

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SECTION 924

EMPLOYMENT WITH AN ASSURANCE CLIENT



924.2 Employment relationships with an assurance client might create a self-interest, familiarity or intimidation threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.


924.3 A1 A familiarity or intimidation threat might be created if any of the following individuals have been an assurance team member or partner of the firm:

● A director or officer of the assurance client.

● An employee who is in a position to exert significant influence over the subject matter information of the assurance engagement.

Former Partner or Assurance Team Member Restrictions

R924.4 If a former partner has joined an assurance client of the firm or a former assurance team member has joined the assurance client as:


(b) An employee in a position to exert significant influence over the subject matter information of the assurance engagement,

the individual shall not continue to participate in the firm’s business or professional activities.

924.4 A1 Even if one of the individuals described in paragraph R924.4 has joined the assurance client in such a position and does not continue to participate in the firm’s business or professional activities, a familiarity or intimidation threat might still be created.

924.4 A2 A familiarity or intimidation threat might also be created if a former partner of the firm has joined an entity in one of the positions described in paragraph 924.3 A1 and the entity subsequently becomes an assurance client of the firm.

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● The position the individual has taken at the client.

● Any involvement the individual will have with the assurance team.

● The length of time since the individual was an assurance team member or partner of the firm.

● The former position of the individual within the assurance team or firm. An example is whether the individual was responsible for maintaining regular contact with the client’s management or those charged with governance.

924.4 A4 Examples of actions that might be safeguards to address such a familiarity or intimidation threat include:

● Making arrangements such that the individual is not entitled to any benefits or payments from the firm, unless made in accordance with fixed pre-determined arrangements.

● Making arrangements such that any amount owed to the individual is not material to the firm.

● Modifying the plan for the assurance engagement.

● Assigning to the assurance team individuals who have sufficient experience relative to the individual who has joined the client.

● Having an appropriate reviewer review the work of the former assurance team member.

Assurance Team Members Entering Employment Negotiations with a Client

R924.5 A firm shall have policies and procedures that require assurance team members to notify the firm when entering employment negotiations with an assurance client.

924.5 A1 A self-interest threat is created when an assurance team member participates in the assurance engagement while knowing that the assurance team member will, or might, join the client sometime in the future.

924.5 A2 An example of an action that might eliminate such a self-interest threat is removing the individual from the assurance engagement.

924.5 A3 An example of an action that might be a safeguard to address such a self-interest threat is having an appropriate reviewer review any significant judgments made by that assurance team member while on the team.

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SECTION 940

LONG ASSOCIATION OF PERSONNEL WITH AN ASSURANCE CLIENT



940.2 When an individual is involved in an assurance engagement of a recurring nature over a long period of time, familiarity and self-interest threats might be created. This section sets out requirements and application material relevant to applying the conceptual framework in such circumstances.


940.3 A1 A familiarity threat might be created as a result of an individual’s long association with:

(a) The assurance client;

(b) The assurance client’s senior management; or

(c) The subject matter and subject matter information of the assurance engagement.

940.3 A2 A self-interest threat might be created as a result of an individual’s concern about losing a longstanding assurance client or an interest in maintaining a close personal relationship with a member of senior management or those charged with governance. Such a threat might influence the individual’s judgment inappropriately.

940.3 A3 Factors that are relevant to evaluating the level of such familiarity or self-interest threats include:

● The nature of the assurance engagement.

● How long the individual has been an assurance team member, the individual’s seniority on the team, and the nature of the roles performed, including if such a relationship existed while the individual was at a prior firm.

● The extent to which the work of the individual is directed, reviewed and supervised by more senior personnel.

● The extent to which the individual, due to the individual’s seniority, has the ability to influence the outcome of the 257

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assurance engagement, for example, by making key decisions or directing the work of other engagement team members.

● The closeness of the individual’s personal relationship with the assurance client or, if relevant, senior management.

● The nature, frequency and extent of interaction between the individual and the assurance client.

● Whether the nature or complexity of the subject matter or subject matter information has changed.

● Whether there have been any recent changes in the individual or individuals who are the responsible party or, if relevant, senior management.

940.3 A4 The combination of two or more factors might increase or reduce the level of the threats. For example, familiarity threats created over time by the increasingly close relationship between an individual and the assurance client would be reduced by the departure of the individual who is the responsible party.

940.3 A5 An example of an action that might eliminate the familiarity and self-interest threats in relation to a specific engagement would be rotating the individual off the assurance team.

940.3 A6 Examples of actions that might be safeguards to address such familiarity or self-interest threats include:

● Changing the role of the individual on the assurance team or the nature and extent of the tasks the individual performs.

● Having an appropriate reviewer who was not an assurance team member review the work of the individual.

● Performing regular independent internal or external quality reviews of the engagement.

R940.4 If a firm decides that the level of the threats created can only be addressed by rotating the individual off the assurance team, the firm shall determine an appropriate period during which the individual shall not:

(a) Be a member of the engagement team for the assurance engagement;

(b) Provide quality control for the assurance engagement; or

(c) Exert direct influence on the outcome of the assurance engagement.

The period shall be of sufficient duration to allow the familiarity and self-interest threats to be addressed.

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SECTION 950

PROVISION OF NON-ASSURANCE SERVICES TO ASSURANCE CLIENTS OTHER THAN AUDIT AND REVIEW ENGAGEMENT CLIENTS


independent, and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to independence.

950.2 Firms might provide a range of non-assurance services to their assurance clients, consistent with their skills and expertise. Providing certain non-assurance services to assurance clients might create threats to compliance with the fundamental principles and threats to independence. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.


R950.3 Before a firm accepts an engagement to provide a non-assurance service to an assurance client, the firm shall determine whether providing such a service might create a threat to independence.

950.3 A1 The requirements and application material in this section assist firms in analyzing certain types of non-assurance services and the related threats that might be created when a firm accepts or provides non-assurance services to an assurance client.

950.3 A2 New business practices, the evolution of financial markets and changes in information technology are among the developments that make it impossible to draw up an all-inclusive list of non-assurance services that might be provided to an assurance client. As a result, the Code does not include an exhaustive listing of all non-assurance services that might be provided to an assurance client.

Evaluating Threats

950.4 A1 Factors that are relevant in evaluating the level of threats created by providing a non-assurance service to an assurance client include:

● The nature, scope and purpose of the service.

● The degree of reliance that will be placed on the outcome of the service as part of the assurance engagement.

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● The legal and regulatory environment in which the service is provided.

● Whether the outcome of the service will affect matters reflected in the subject matter or subject matter information of the assurance engagement, and, if so:

○ The extent to which the outcome of the service will have a material or significant effect on the subject matter of the assurance engagement.

○ The extent of the assurance client’s involvement in determining significant matters of judgment.

● The level of expertise of the client’s management and employees with respect to the type of service provided.

Materiality in Relation to an Assurance Client’s Information

950.4 A2 The concept of materiality in relation to an assurance client’s information is addressed in International Standard on Assurance Engagements (ISAE) 3000 (Revised), Assurance Engagements other than Audits or Reviews of Historical Financial Information. The determination of materiality involves the exercise of professional judgment and is impacted by both quantitative and qualitative factors. It is also affected by perceptions of the financial or other information needs of users.

Multiple Non-assurance Services Provided to the Same Assurance Client

950.4 A3 A firm might provide multiple non-assurance services to an assurance client. In these circumstances the combined effect of threats created by providing those services is relevant to the firm’s evaluation of threats.

Addressing Threats

950.5 A1 Paragraph 120.10 A2 includes a description of safeguards. In relation to providing non-assurance services to assurance clients, safeguards are actions, individually or in combination, that the firm takes that effectively reduce threats to independence to an acceptable level. In some situations, when a threat is created by providing a service to an assurance client, safeguards might not be available. In such situations, the application of the conceptual framework set out in Section 120 requires the firm to decline or end the non-assurance service or the assurance engagement.

Prohibition on Assuming Management Responsibilities

R950.6 A firm shall not assume a management responsibility related to the subject matter or subject matter information of an assurance engagement provided by the firm. If the firm assumes a management responsibility

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as part of any other service provided to the assurance client, the firm shall ensure that the responsibility is not related to the subject matter or subject matter information of the assurance engagement provided by the firm.

950.6 A1 Management responsibilities involve controlling, leading and directing an entity, including making decisions regarding the acquisition, deployment and control of human, financial, technological, physical and intangible resources.

950.6 A2 Providing a non-assurance service to an assurance client creates self-review and self-interest threats if the firm assumes a management responsibility when performing the service. In relation to providing a service related to the subject matter or subject matter information of an assurance engagement provided by the firm, assuming a management responsibility also creates a familiarity threat and might create an advocacy threat because the firm becomes too closely aligned with the views and interests of management.

950.6 A3 Determining whether an activity is a management responsibility depends on the circumstances and requires the exercise of professional judgment. Examples of activities that would be considered a management responsibility include:

● Setting policies and strategic direction.

● Hiring or dismissing employees.

● Directing and taking responsibility for the actions of employees in relation to the employees’ work for the entity.

● Authorizing transactions.

● Controlling or managing bank accounts or investments.

● Deciding which recommendations of the firm or other third parties to implement.

● Reporting to those charged with governance on behalf of management.

● Taking responsibility for designing, implementing, monitoring and maintaining internal control.

950.6 A4 Providing advice and recommendations to assist the management of an assurance client in discharging its responsibilities is not assuming a management responsibility. (Ref: Paras. R950.6 to 950.6 A3).

R950.7 To avoid assuming a management responsibility when providing non-assurance services to an assurance client that are related to the subject matter or subject matter information of the assurance

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engagement, the firm shall be satisfied that client management makes all related judgments and decisions that are the proper responsibility of management. This includes ensuring that the client’s management:

(a) Designates an individual who possesses suitable skill, knowledge and experience to be responsible at all times for the client’s decisions and to oversee the services. Such an individual, preferably within senior management, would understand:

(i) The objectives, nature and results of the services; and

(ii) The respective client and firm responsibilities.

However, the individual is not required to possess the expertise to perform or re-perform the services.

(b) Provides oversight of the services and evaluates the adequacy of the results of the service performed for the client’s purpose; and

(c) Accepts responsibility for the actions, if any, to be taken arising from the results of the services.

Other Considerations Related to Providing Specific Non-Assurance Services

950.8 A1 A self-review threat might be created if the firm is involved in the preparation of subject matter information which is subsequently the subject matter information of an assurance engagement. Examples of non-assurance services that might create such self-review threats when providing services related to the subject matter information of an assurance engagement include:

(a) Developing and preparing prospective information and subsequently providing assurance on this information.

(b) Performing a valuation that forms part of the subject matter information of an assurance engagement.

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SECTION 990

REPORTS THAT INCLUDE A RESTRICTION ON USE AND DISTRIBUTION (ASSURANCE ENGAGEMENTS OTHER THAN AUDIT AND REVIEW ENGAGEMENTS)



990.2 This section sets out certain modifications to Part 4B which are permitted in certain circumstances involving assurance engagements where the report includes a restriction on use and distribution. In this section, an engagement to issue a restricted use and distribution assurance report in the circumstances set out in paragraph R990.3 is referred to as an “eligible assurance engagement.”


R990.3 When a firm intends to issue a report on an assurance engagement which includes a restriction on use and distribution, the independence requirements set out in Part 4B shall be eligible for the modifications that are permitted by this section, but only if:

(a) The firm communicates with the intended users of the report regarding the modified independence requirements that are to be applied in providing the service; and

(b) The intended users of the report understand the purpose, subject matter information and limitations of the report and explicitly agree to the application of the modifications.

990.3 A1 The intended users of the report might obtain an understanding of the purpose, subject matter information, and limitations of the report by participating, either directly, or indirectly through a representative who has authority to act for the intended users, in establishing the nature and scope of the engagement. In either case, this participation helps the firm to communicate with intended users about independence matters, including the circumstances that are relevant to applying the conceptual framework. It also allows the firm to obtain the agreement of the intended users to the modified independence requirements.

R990.4 Where the intended users are a class of users who are not specifically identifiable by name at the time the engagement terms are established,

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the firm shall subsequently make such users aware of the modified independence requirements agreed to by their representative.

990.4 A1 For example, where the intended users are a class of users such as lenders in a syndicated loan arrangement, the firm might describe the modified independence requirements in an engagement letter to the representative of the lenders. The representative might then make the firm’s engagement letter available to the members of the group of lenders to meet the requirement for the firm to make such users aware of the modified independence requirements agreed to by the representative.

R990.5 When the firm performs an eligible assurance engagement, any modifications to Part 4B shall be limited to those modifications set out in paragraphs R990.7 and R990.8.

R990.6 If the firm also issues an assurance report that does not include a restriction on use and distribution for the same client, the firm shall apply Part 4B to that assurance engagement.

Financial Interests, Loans and Guarantees, Close Business, Family and Personal Relationships

R990.7 When the firm performs an eligible assurance engagement:

(a) The relevant provisions set out in Sections 910, 911, 920, 921, 922 and 924 need apply only to the members of the engagement team, and their immediate and close family members;

(b) The firm shall identify, evaluate and address any threats to independence created by interests and relationships, as set out in Sections 910, 911, 920, 921, 922 and 924, between the assurance client and the following assurance team members;

(i) Those who provide consultation regarding technical or industry specific issues, transactions or events; and

(ii) Those who provide quality control for the engagement, including those who perform the engagement quality control review; and

(c) The firm shall evaluate and address any threats that the engagement team has reason to believe are created by interests and relationships between the assurance client and others within the firm who can directly influence the outcome of the assurance engagement, as set out in Sections 910, 911, 920, 921, 922 and 924.

990.7 A1 Others within the firm who can directly influence the outcome of the assurance engagement include those who recommend the compensation,

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or who provide direct supervisory, management or other oversight, of the assurance engagement partner in connection with the performance of the assurance engagement.

R990.8 When the firm performs an eligible assurance engagement, the firm shall not hold a material direct or a material indirect financial interest in the assurance client.

GLOSSARY

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GLOSSARY, INCLUDING LISTS OF ABBREVIATIONS In the International Code of Ethics for Professional Accountants (including International Independence Standards), the singular shall be construed as including the plural as well as the reverse, and the terms below have the following meanings assigned to them.

In this Glossary, explanations of defined terms are shown in regular font; italics are used for explanations of described terms which have a specific meaning in certain parts of the Code or for additional explanations of defined terms. References are also provided to terms described in the Code.

Acceptable level A level at which a professional accountant using the reasonable and informed third party test would likely conclude that the accountant complies with the fundamental principles.

Advertising The communication to the public of information as to the services or skills provided by professional accountants in public practice with a view to procuring professional business.

Appropriate reviewer

An appropriate reviewer is a professional with the necessary knowledge, skills, experience and authority to review, in an objective manner, the relevant work performed or service provided. Such an individual might be a professional accountant.

This term is described in paragraph 300.8 A4.

Assurance client The responsible party that is the person (or persons) who:

(a) In a direct reporting engagement, is responsible for the subject matter; or

(b) In an assertion-based engagement, is responsible for the subject matter information and might be responsible for the subject matter.

Assurance engagement

An engagement in which a professional accountant in public practice expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.

(For guidance on assurance engagements, see the International Framework for Assurance Engagements issued by the International Auditing and Assurance Standards Board. The International Framework for Assurance Engagements describes the elements and objectives of an assurance engagement and identifies engagements to which International Standards on Auditing (ISAs), International Standards on Review Engagements (ISREs) and International Standards on Assurance Engagements (ISAEs) apply.) 266

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Assurance team (a) All members of the engagement team for the assurance engagement;

(b) All others within a firm who can directly influence the outcome of the assurance engagement, including:

(i) Those who recommend the compensation of, or who provide direct supervisory, management or other oversight of the assurance engagement partner in connection with the performance of the assurance engagement;

(ii) Those who provide consultation regarding technical or industry specific issues, transactions or events for the assurance engagement; and

(iii) Those who provide quality control for the assurance engagement, including those who perform the engagement quality control review for the assurance engagement.

Audit In Part 4A, the term “audit” applies equally to “review.”

Audit client An entity in respect of which a firm conducts an audit engagement. When the client is a listed entity, audit client will always include its related entities. When the audit client is not a listed entity, audit client includes those related entities over which the client has direct or indirect control. (See also paragraph R400.20.)

In Part 4A, the term “audit client” applies equally to “review client.”

Audit engagement A reasonable assurance engagement in which a professional accountant in public practice expresses an opinion whether financial statements are prepared, in all material respects (or give a true and fair view or are presented fairly, in all material respects), in accordance with an applicable financial reporting framework, such as an engagement conducted in accordance with International Standards on Auditing. This includes a Statutory Audit, which is an audit required by legislation or other regulation.

In Part 4A, the term “audit engagement” applies equally to “review engagement.”

Audit report In Part 4A, the term “audit report” applies equally to “review report.”

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Audit team (a) All members of the engagement team for the audit engagement;

(b) All others within a firm who can directly influence the outcome of the audit engagement, including:

(i) Those who recommend the compensation of, or who provide direct supervisory, management or other oversight of the engagement partner in connection with the performance of the audit engagement, including those at all successively senior levels above the engagement partner through to the individual who is the firm’s Senior or Managing Partner (Chief Executive or equivalent);

(ii) Those who provide consultation regarding technical or industry-specific issues, transactions or events for the engagement; and

(iii) Those who provide quality control for the engagement, including those who perform the engagement quality control review for the engagement; and

All those within a network firm who can directly influence the outcome of the audit engagement.

In Part 4A, the term “audit team” applies equally to “review team.”

Close family A parent, child or sibling who is not an immediate family member.

Conceptual framework

This term is described in Section 120.

Contingent fee A fee calculated on a predetermined basis relating to the outcome of a transaction or the result of the services performed by the firm. A fee that is established by a court or other public authority is not a contingent fee.

Cooling-off period This term is described in paragraph R540.5 for the purposes of paragraphs R540.11 to R540.19.

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Direct financial interest

A financial interest:

(a) Owned directly by and under the control of an individual or entity (including those managed on a discretionary basis by others); or

(b) Beneficially owned through a collective investment vehicle, estate, trust or other intermediary over which the individual or entity has control, or the ability to influence investment decisions.

Director or officer Those charged with the governance of an entity, or acting in an equivalent capacity, regardless of their title, which might vary from jurisdiction to jurisdiction.

Eligible audit engagement

This term is described in paragraph 800.2 for the purposes of Section 800.

Eligible assurance engagement

This term is described in paragraph 990.2 for the purposes of Section 990.

Engagement partner

The partner or other person in the firm who is responsible for the engagement and its performance, and for the report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body.

Engagement period

(Audit and Review Engagements)

The engagement period starts when the audit team begins to perform the audit. The engagement period ends when the audit report is issued. When the engagement is of a recurring nature, it ends at the later of the notification by either party that the professional relationship has ended or the issuance of the final audit report.

Engagement period

(Assurance Engagements Other than Audit and Review Engagements)

The engagement period starts when the assurance team begins to perform assurance services with respect to the particular engagement. The engagement period ends when the assurance report is issued. When the engagement is of a recurring nature, it ends at the later of the notification by either party that the professional relationship has ended or the issuance of the final assurance report.

Engagement quality control review

A process designed to provide an objective evaluation, on or before the report is issued, of the significant judgments the engagement team made and the conclusions it reached in formulating the report.

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Engagement team All partners and staff performing the engagement, and any individuals engaged by the firm or a network firm who perform assurance procedures on the engagement. This excludes external experts engaged by the firm or by a network firm.

The term “engagement team” also excludes individuals within the client’s internal audit function who provide direct assistance on an audit engagement when the external auditor complies with the requirements of ISA 610 (Revised 2013), Using the Work of Internal Auditors.

Existing accountant

A professional accountant in public practice currently holding an audit appointment or carrying out accounting, tax, consulting or similar professional services for a client.

External expert An individual (who is not a partner or a member of the professional staff, including temporary staff, of the firm or a network firm) or organization possessing skills, knowledge and experience in a field other than accounting or auditing, whose work in that field is used to assist the professional accountant in obtaining sufficient appropriate evidence.

Financial interest An interest in an equity or other security, debenture, loan or other debt instrument of an entity, including rights and obligations to acquire such an interest and derivatives directly related to such interest.

Financial statements

A structured representation of historical financial information, including related notes, intended to communicate an entity’s economic resources or obligations at a point in time or the changes therein for a period of time in accordance with a financial reporting framework. The related notes ordinarily comprise a summary of significant accounting policies and other explanatory information. The term can relate to a complete set of financial statements, but it can also refer to a single financial statement, for example, a balance sheet, or a statement of revenues and expenses, and related explanatory notes.

Financial statements on which the firm will express an opinion

In the case of a single entity, the financial statements of that entity. In the case of consolidated financial statements, also referred to as group financial statements, the consolidated financial statements.

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Firm (a) A sole practitioner, partnership or corporation of professional accountants;

(b) An entity that controls such parties, through ownership, management or other means; and

(c) An entity controlled by such parties, through ownership, management or other means.

Paragraphs 400.4 and 900.3 explain how the word “firm” is used to address the responsibility of professional accountants and firms for compliance with Parts 4A and 4B, respectively.

Fundamental principles

This term is described in paragraph 110.1 A1.Each of the fundamental principles is, in turn, described in the following paragraphs:

Integrity ObjectivityProfessional competence and due careConfidentialityProfessional behavior

R111.1R112.1R113.1R114.1R115.1

Historical financial information

Information expressed in financial terms in relation to a particular entity, derived primarily from that entity’s accounting system, about economic events occurring in past time periods or about economic conditions or circumstances at points in time in the past.

Immediate family A spouse (or equivalent) or dependent.

Independence Independence comprises:

(a) Independence of mind – the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity, and exercise objectivity and professional skepticism.

(b) Independence in appearance – the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude that a firm’s, or an audit or assurance team member’s, integrity, objectivity or professional skepticism has been compromised.

As set out in paragraphs 400.5 and 900.4, references to an individual or firm being “independent” mean that the individual or firm has complied with Parts 4A and 4B, as applicable.

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Indirect financial interest

A financial interest beneficially owned through a collective investment vehicle, estate, trust or other intermediary over which the individual or entity has no control or ability to influence investment decisions.

Inducement An object, situation, or action that is used as a means to influence another individual’s behavior, but not necessarily with the intent to improperly influence that individual’s behavior.

Inducements can range from minor acts of hospitality between business colleagues (for professional accountants in business), or between professional accountants and existing or prospective clients (for professional accountants in public practice), to acts that result in non-compliance with laws and regulations. An inducement can take many different forms, for example:

• Gifts.

• Hospitality.

• Entertainment.

• Political or charitable donations.

• Appeals to friendship and loyalty.

• Employment or other commercial opportunities.

• Preferential treatment, rights or privileges.

Key audit partner The engagement partner, the individual responsible for the engagement quality control review, and other audit partners, if any, on the engagement team who make key decisions or judgments on significant matters with respect to the audit of the financial statements on which the firm will express an opinion. Depending upon the circumstances and the role of the individuals on the audit, “other audit partners” might include, for example, audit partners responsible for significant subsidiaries or divisions.

Listed entity An entity whose shares, stock or debt are quoted or listed on a recognized stock exchange, or are marketed under the regulations of a recognized stock exchange or other equivalent body.

May This term is used in the Code to denote permission to take a particular action in certain circumstances, including as an exception to a requirement. It is not used to denote possibility.

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Might This term is used in the Code to denote the possibility of a matter arising, an event occurring or a course of action being taken. The term does not ascribe any particular level of possibility or likelihood when used in conjunction with a threat, as the evaluation of the level of a threat depends on the facts and circumstances of any particular matter, event or course of action.

Network A larger structure:

(a) That is aimed at co-operation; and

(b) That is clearly aimed at profit or cost sharing or shares common ownership, control or management, common quality control policies and procedures, common business strategy, the use of a common brand-name, or a significant part of professional resources.

Network firm A firm or entity that belongs to a network.

For further information, see paragraphs 400.50 A1 to 400.54 A1.

Non-compliance with laws and regulations

(Professional Accountants in Business)

Non-compliance with laws and regulations (“non-compliance”) comprises acts of omission or commission, intentional or unintentional, which are contrary to the prevailing laws or regulations committed by the following parties: (a) The professional accountant’s employing

organization; (b) Those charged with governance of the employing

organization; (c) Management of the employing organization; or (d) Other individuals working for or under the direction

of the employing organization.This term is described in paragraph 260.5 A1.

Non-compliance with laws and regulations

(Professional Accountants in Public Practice)

Non-compliance with laws and regulations (“non-compliance”) comprises acts of omission or commission, intentional or unintentional, which are contrary to the prevailing laws or regulations committed by the following parties: (a) A client; (b) Those charged with governance of a client; (c) Management of a client; or (d) Other individuals working for or under the direction of a client.This term is described in paragraph 360.5 A1. 273

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Office A distinct sub-group, whether organized on geographical or practice lines.

Predecessor accountant

A professional accountant in public practice who most recently held an audit appointment or carried out accounting, tax, consulting or similar professional services for a client, where there is no existing accountant.

Professional accountant

An individual who is a member of an IFAC member body.

In Part 1, the term “professional accountant” refers to individual professional accountants in business and to professional accountants in public practice and their firms.

In Part 2, the term “professional accountant” refers to professional accountants in business.

In Parts 3, 4A and 4B, the term “professional accountant” refers to professional accountants in public practice and their firms.

Professional accountant in business

A professional accountant working in areas such as commerce, industry, service, the public sector, education, the not-for-profit sector, or in regulatory or professional bodies, who might be an employee, contractor, partner, director (executive or non-executive), owner-manager or volunteer.

Professional accountant in public practice

A professional accountant, irrespective of functional classification (for example, audit, tax or consulting) in a firm that provides professional services.

The term “professional accountant in public practice” is also used to refer to a firm of professional accountants in public practice.

Professional activity

An activity requiring accountancy or related skills undertaken by a professional accountant, including accounting, auditing, tax, management consulting, and financial management.

Professional services Professional activities performed for clients.

Proposed accountant

A professional accountant in public practice who is considering accepting an audit appointment or an engagement to perform accounting, tax, consulting or similar professional services for a prospective client (or in some cases, an existing client).

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Public interest entity

(a) A listed entity; or

(b) An entity:

(i) Defined by regulation or legislation as a public interest entity; or

(ii) For which the audit is required by regulation or legislation to be conducted in compliance with the same independence requirements that apply to the audit of listed entities. Such regulation might be promulgated by any relevant regulator, including an audit regulator.

Other entities might also be considered to be public interest entities, as set out in paragraph 400.8.

Reasonable and informed third party

Reasonable and informed third party test

The reasonable and informed third party test is a consideration by the professional accountant about whether the same conclusions would likely be reached by another party. Such consideration is made from the perspective of a reasonable and informed third party, who weighs all the relevant facts and circumstances that the accountant knows, or could reasonably be expected to know, at the time that the conclusions are made. The reasonable and informed third party does not need to be an accountant, but would possess the relevant knowledge and experience to understand and evaluate the appropriateness of the accountant’s conclusions in an impartial manner.

These terms are described in paragraph R120.5 A4.

Related entity An entity that has any of the following relationships with the client:

(a) An entity that has direct or indirect control over the client if the client is material to such entity;

(b) An entity with a direct financial interest in the client if that entity has significant influence over the client and the interest in the client is material to such entity;

(c) An entity over which the client has direct or indirect control;

(d) An entity in which the client, or an entity related to the client under (c) above, has a direct financial interest that gives it significant influence over such entity and the interest is material to the client and its related entity in (c); and275

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(e) An entity which is under common control with the client (a “sister entity”) if the sister entity and the client are both material to the entity that controls both the client and sister entity.

Review client An entity in respect of which a firm conducts a review engagement.

Review engagement

An assurance engagement, conducted in accordance with International Standards on Review Engagements or equivalent, in which a professional accountant in public practice expresses a conclusion on whether, on the basis of the procedures which do not provide all the evidence that would be required in an audit, anything has come to the accountant’s attention that causes the accountant to believe that the financial statements are not prepared, in all material respects, in accordance with an applicable financial reporting framework.

Review team (a) All members of the engagement team for the review engagement; and

(b) All others within a firm who can directly influence the outcome of the review engagement, including:

(i) Those who recommend the compensation of, or who provide direct supervisory, manage-ment or other oversight of the engagement partner in connection with the performance of the review engagement, including those at all successively senior levels above the engagement partner through to the individual who is the firm’s Senior or Managing Partner (Chief Executive or equivalent);

(ii) Those who provide consultation regarding technical or industry specific issues, transactions or events for the engagement; and

(iii) Those who provide quality control for the engagement, including those who perform the engagement quality control review for the engagement; and

All those within a network firm who can directly influence the outcome of the review engagement.

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Safeguards Safeguards are actions, individually or in combination, that the professional accountant takes that effectively reduce threats to compliance with the fundamental principles to an acceptable level.


Senior professional accountant in business

Senior professional accountants in business are directors, officers or senior employees able to exert significant influence over, and make decisions regarding, the acquisition, deployment and control of the employing organization’s human, financial, technological, physical and intangible resources.


Substantial harm This term is described in paragraphs 260.5 A3 and 360.5 A3.

Special purpose financial statements

Financial statements prepared in accordance with a financial reporting framework designed to meet the financial information needs of specified users.

Those charged with governance

The person(s) or organization(s) (for example, a corporate trustee) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting process. For some entities in some jurisdictions, those charged with governance might include management personnel, for example, executive members of a governance board of a private or public sector entity, or an owner-manager.

Threats This term is described in paragraph 120.6 A3 and includes the following categories:

Self interestSelf-reviewAdvocacyFamiliarityIntimidation

120.6 A3(a) 120.6 A3(b) 120.6 A3(c) 120.6 A3(d) 120.6 A3(e)

Time-on period This term is described in paragraph R540.5.

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LISTS OF ABBREVIATIONS AND STANDARDS REFERRED TO IN THE CODE

LIST OF ABBREVIATIONS

Abbreviation ExplanationAssurance Framework International Framework for Assurance Engagements

COSO Committee of Sponsoring Organizations of the Treadway Commission

CoCoChartered Professional Accountants of Canada Criteria of Control

IAASB International Auditing and Assurance Standards BoardIESBA International Ethics Standards Board for AccountantsIFAC International Federation of Accountants ISAs International Standards on AuditingISAEs International Standards on Assurance EngagementsISQCs International Standards on Quality Control ISREs International Standards on Review Engagements

LIST OF STANDARDS REFERRED TO IN THE CODE

Standard Full TitleISA 320 Materiality In Planning and Performing an AuditISA 610 (Revised 2013)

Using the Work of Internal Auditors

ISAE 3000 (Revised) Assurance Engagements Other than Audits or Reviews of Historical Financial Information

ISQC 1 Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements

ISRE 2400 (Revised) Engagements to Review Historical Financial Statements

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EFFECTIVE DATE

• Parts 1, 2 and 3 will be effective as of June 15, 2019.

• Part 4A relating to independence for audit and review engagements will be effective for audits and reviews of financial statements for periods begin-ning on or after June 15, 2019.

• Part 4B relating to independence for assurance engagements with respect to subject matter covering periods will be effective for periods beginning on or after June 15, 2019; otherwise, it will be effective as of June 15, 2019.

Early adoption is permitted.

Refer also to page 5 of the handbook for information about the effective date for the revised long association provisions which the IESBA released in January 2017 as a “close-off document” under the previous structure and drafting conventions.

279

THIS PAGE INTENTIONALLY LEFT BLANK

280

WARRINGTON BOROUGH COUNCIL AUDIT AND CORPORATE GOVERNANCE COMMITTEE 17 JANUARY 2019

Report of: Lynton Green, Deputy Chief Executive and Director of Corporate Services

Report Author:

Jean Gleave, Head of Internal Audit, Risk and Insurance

Contact Details: Email Address: [email protected]

Telephone: 01925 442354

Ward Members:

ALL

TITLE OF REPORT: RISK AND INSURANCE UPDATE FOR QUARTER 2, 2018/19

1. PURPOSE 1.1 The report provides an overview of the Council’s risk management and insurance

activity for the first six months of 2018/19. 2. CONFIDENTIAL OR EXEMPT 2.1 The report is not confidential or exempt. 3. INTRODUCTION AND BACKGROUND 3.1 The risk and insurance service supports projects, directorates and senior managers to

maintain appropriate risk management arrangements and ensures that insurance cover is in place to protect the Council from the risk of financial loss arising from its responsibilities as an employer, an owner and occupier of property, a highways authority and a provider of public services.

3.2 The service also facilitates the reporting process, to ensure that directorate

management teams, the senior management team, the Executive Board and the Audit and Corporate Governance Committee have appropriate oversight of strategic risks and associated control arrangements.

Item 6

281


4. RISK MANAGEMENT 4.1 Strategic risks are those which have the potential to impact on the Council’s

achievement of its corporate pledges and strategic objectives. The strategic risk register therefore provides an overview of the most important risks facing the Council. Operational registers are also maintained at directorate, service and project level.

4.2 Risks are escalated to the strategic risk register where:

Risk ratings remain over an agreed tolerance level, even after the application of agreed control strategies.

Or, risks are considered to require ongoing strategic oversight owing to the potential reputational and financial impact of those risks.

4.3 Regular review of risk registers should provide assurance that:

Risks to the achievement of Council pledges and key business objectives have been identified and assessed.

Controls are in place to manage risks to an acceptable level of tolerance or that areas where additional treatments may be required have been identified.

The strategic decision making process is supported by a comprehensive understanding of the Council’s overall risk environment.

5. STRATEGIC RISK MANAGEMENT 5.1 The strategic risk register at quarter 2 is provided at Appendix 1. A summary is

provided in Figure 1 below while Figure 2 provides an overview of the Council’s strategic risk profile and specifically, the number of risks recorded against each ranking at the end of quarter 2. Matters for the Committee’s consideration as part of its review are highlighted in paragraphs 5.3 to 5.7.

5.2 By definition the strategic risk register contains a significant proportion of high or red

rated risks. This does not mean that the Council is not managing its risks effectively; rather it is a reflection of the breadth of the Council’s statutory and public service responsibilities, combined with the sometimes limited options it has to respond to the risks arising from those responsibilities. The narrative below is therefore focused on the most volatile and high profile risks, to aid the Committee’s understanding of the overall risk environment.

282

Figure 1

0

5

10

15

20

25SR

R 1

a

SRR

1b

SRR

1c

SRR

2

SRR

3

SRR

4

SRR

5

SRR

6

SRR

7

SRR

8

SRR

9

SRR

10

SRR

11

SRR

12

SRR

13

SRR

14

SRR

15

SRR

16

SRR

17

SRR

18

SRR

19

SRR

20

SRR

21

SRR

22

Strategic Risk RegisterQ4 2017/18 to Q2 2018/19

Q4 2017/18 Q2 2018/19

Figure 2

ASSESSMENT SCORE

SEVERE 5 1 3

SERIOUS 4 9 7 1

MODERATE 3 1

MINOR 2 1

TRIVIAL 1

RARE UNLIKELY POSSIBLE PROBABLEALMOST

CERTAIN

1 2 3 4 5

Acceptable

(score 1 to 4)

Significant

(score 9 to 12)

Manageable

(score 5 to 8)

Major

(score 15 to

25)

LIKELIHOOD

I

M

P

A

C

T

RISK ASSESSMENT

ASSESSMENT

SCORE

283

5.3 Risks relating to social care remain significant; however officers are working proactively to manage demand more effectively, provide earlier and more targeted support, and in collaboration with health and other partners, to ensure appropriateness and security of provision. Officers have therefore proposed the removal of SRR 8, the risk of a complete failure in the health and social care system, as it is considered that the risks are captured adequately by SRR 1 and SRR 2. The risks involved in moving towards a more collaborative system of health and social care are currently being reviewed as part of the Better Care Fund and Warrington Together programmes.

5.4 SRR 5, which reflects the risks resulting from educational reforms, is now assessed as

low risk, following redesign of the school improvement service and the effective working relationships which have been established with Teaching Schools.

5.5 The Time Square development is progressing well. However, given the scale and

complexity of this project, significant risks remain, which are being actively managed by the Programme Board. The Great Sankey Neighbourhood Hub development is now at a stage where the majority of works are complete. Contingency plans have been enacted and outstanding matters are being addressed. The narratives for SRR 13 and 14 have been updated accordingly.

5.6 SRR 16 has been updated to reflect the implementation of the General Data

Protection Regulations and the Data Protection Act 2018. The likelihood score for SRR 16 has increased to reflect the recent increase in the number of incidents being reported to the information governance team for investigation and where appropriate, notification to the Information Commissioner’s Office.

5.7 A new risk, SRR 22, has been added to the register, to articulate the strategic risks to

the Council and Warrington arising from the UK’s exit from the European Union and the actions being taken to mitigate its impact. Clearly this is an emerging area of risk and activity which will develop rapidly in the run up to March 2019.

6. INSURANCE ACTIVITY 6.1 Insurance claims activity for the period April to September 2018 is summarised in

Figure 3 below. Should the Council be found liable for the totality of the outstanding caseload, insurers would meet costs over the excess for the relevant policies, currently estimated at £1.373 million. The balance of £1.998 million would fall to the Council and is provided for within the Council’s insurance fund.

284

Figure 3

Number of Claims

Cost Estimates £’000

Outstanding caseload at 1 April 2018 231 3,005 New claims reported during Q1 and Q2 156 453 Claims closed during Q1 and Q2 -131 -117 Revaluations of outstanding claims 31 Outstanding caseload at 30 September 2018 256 3,372

6.2 131 claims, including 74 highways related claims were closed during this period at a

total cost of just under £40,000 against an initial reserve of £117,000. The majority of claims were closed without payment and costs were incurred against 16 of the 131 cases:

Four claims were settled with schools, for minor property damage related issues.

Two settlements were paid to third party motorists, for damage caused to their vehicles by Council drivers.

Two payments were made to pupils for losses relating to injuries suffered whilst on school trips.

A payment was made to a school employee for an injury caused by manual handling.

Five claims were paid to third parties for injuries or property damage caused by the Council’s negligence in failing to maintain its land or highways.

Two claims were denied although legal costs were incurred in doing so. 6.3 New claims reported between April and September 2018 are roughly 40% higher

than for the same period last year but remain below the volumes experienced in recent years, as demonstrated by Figure 4 below.

285

Figure 4

0

100

200

300

400

500

600

APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR

Cumulative Number of Claims Reported By Month

2014/15 2015/16 2016/17 2017/18 2018/19

6.4 As shown in Figure 5, the caseload by volume continues to be dominated by

highways related public liability claims. 47% of the new claims reported between April and September 2018 were highways related.

Figure 5

Employer's Liability15%

Property8%

Public Liability -Highways

36%

Public Liability -Other26%

Motor15%

Open Claims at 30 September 2018by Volume and Type

6.5 As Figure 6 demonstrates, non-highways related public liability claims account for the

highest proportion of the caseload by value. Within the total claims reserve of £3.372 million are 14 high value claims estimated at £50,000 or more, 12 of which are public liability claims. The claims are alleged to relate to three main causes:

286

Accidents on Council land or property (5 claims).

Breaches in duties of care and/or human rights (4 claims).

Historic sexual abuse (3 claims). 6.6 Collectively these 14 claims account for 49% of the total claims reserve. However 8

of these relate to incidents which occurred prior to the increase in excess levels and so the bulk of costs will fall to insurers.

Figure 6

Employer's Liability17%

Property4%

Public Liability -Highways

19%

Public Liability -Other57%

Motor3%

Open Claims at 30 September 2018by Value and Type

7. NEW AND EMERGING ISSUES 7.1 Our area of focus for this period concerns vicarious liability. Members may be aware

of the recent Court of Appeal judgement in the case of various claimants v Morrisons Supermarkets, upholding the earlier high court judgement that Morrisons was vicariously liable for the tortious act of its employee, who released personal data pertaining to employees of Morrisons, including payroll data, to a file sharing website. Whilst Morrisons was not judged to be directly liable, the court determined that there was a sufficiently close connection between the tortious act committed by the employee and his employment with Morrisons.

7.2 This case has been widely reported as the first of its kind where the courts have had

to determine whether an employer can be vicariously liable in circumstances where the motivation for the tortious act was to harm the very same employer, rather than delivering a benefit to the offender. Effectively, the court’s judgement in this case has enabled the employee to achieve his objective, even though he himself has been convicted of a criminal act and imprisoned.

287

7.3 Recognising that the decision is likely to be appealed by Morrisons, when taken together with other cases including Mohamud v Morrisons Supermarkets (2016) and Bellman v Northampton Recruitment Ltd (2018), it is difficult to identify circumstances when a defendant employer would not be found vicariously liable for the wrongful actions of its employees against innocent claimants. Also notable was the Court’s decision that whilst data breaches are increasingly prevalent and could expose employers to potentially ruinous amounts, this was not a justification for not finding vicarious liability. The court commented that the solution is to insure against such catastrophes.

7.4 Vicarious liability is increasingly being applied to relationships other than direct

employment, as in the cases of: various claimants v Christian Brothers (2015), Cox v Ministry of Justice (2016), various claimants v Barclays Bank (2017) and Armes v Nottinghamshire County Council (2017). The test applied by the courts is to consider whether the relationship between the offender and the defendant is akin to that of employment. The extension of vicarious liability beyond the realm of direct employment means that claimants no longer have to prove that the employer holds a non-delegable duty of care to the injured party, as was the case in Woodlands V Essex County Council (2013).

7.5 Vicarious liability therefore gives rise to two key areas of risk for employers, which

need to be managed not only through insurance, but also with robust HR and contract management arrangements:

Liability for wrongful acts committed by employees, even where the employer itself is not found to be at fault or liable.

Liability for loss or damage suffered by third parties as a result of the actions of parties with whom the employer is judged to have a relationship akin to that of employment, including independent contractors and foster carers.

7.6 The Council’s insurance policies will act if we are found liable, either directly or

vicariously, for causing injury, loss or damage to individuals. However the Council carries an excess of £200,000 on its employer’s and public liability covers and so any claims below this threshold would have to be met from the insurance fund.

8. FINANCIAL CONSIDERATIONS 8.1 Where there are high-level financial implications associated with particular risks,

these are identified in the risk register. For example, a breach of the data protection regulations resulting from a failure in information governance arrangements could result in the Council being fined by the Information Commissioner’s Office.

9. RISK ASSESSMENT 9.1 The Council must ensure that it has appropriate risk management arrangements in

place in order to manage its risks and maintain a sound system of internal control.

288

10. EQUALITY AND DIVERSITY / EQUALITY IMPACT ASSESSMENT 10.1 There are no specific equalities issues in relation to the content of this report. 11. CONSULTATION 11.1 N/A 12. REASONS FOR RECOMMENDATION 12.1 To ensure that the Council maintains an effective framework of internal control and

continues to manage its key risks, and to ensure the continued review of the Council’s strategic risks.

12.2 To assist the Council in meeting its statutory responsibility to review the effectiveness

of its systems of internal control and prepare an annual governance statement. 13. RECOMMENDATION 13.1 The Audit and Corporate Governance Committee is recommended to:

(i) Review and comment on the Council’s strategic risk environment at quarter 2 of 2018/19.

(ii) Note the Council’s performance in managing insurance claims for the first sixth months of the financial year.

(iii) Note the new and emerging issues documented at Section 7 of the report.


(i) The Strategic Risk Register (ii) Risk Management Reports to SMT, Executive Board and the Audit and Corporate

Governance Committee (iii) Analysis of claim data extracted from LACHS (may contain sensitive and/or

confidential information which will require redaction before release)

Contact for Background Papers:


Alison Weir Risk and Insurance Manager

[email protected] 01925 442613

289

APPENDIX 1

Existing Treatment / Controls Planned Treatment / Controls (to be

implemented during 2018/19)

Contingency Plans

(arrangements you already have in place to

reduce the likelihood and/or impact of the

potential risk)

(arrangements you plan to put in place to


potential risk)

(arrangements which can be put into place if

the risk was to materialise now)

SRR 1a

SP

Ric

k H

ow

ell The Council is unable to manage the demand for

adults social care services resulting in additional

financial pressures and potentially unmanaged

reductions in service provision.

12 3 4 12 121

Adults and Children's Services have established

operational activities to manage, prioritise and track

fluctuations and changes in demand effectively.

Reporting is via the DMT and Transformation Board .

Monitoring of demand and capacity to respond is

monitored via regular reporting that takes account of

such issues as risk, wait times and market resilience

etc.

The Transformation for ~Adult Services is focusing on

a model of preventing, reducing and delaying demand

for services through a range of approaches, including

asset based assessment and review, improved access

to self-help, technology and different access

arrangements to services.

The Council is working together with the CCG on a

single commissioning prospectus. Re-commissioning

the domiciliary care framework is now a top priority, as

is the commissioning strategy for extracare housing.

Existing service users have been written to ask

whether they believe they are receiving excess care.

We are referring to this as 'spare care'.

The demand management Transformation programme

in Adult services is fully established and on target to

deliver the majority of Phase 1 Deliverables by end of

October. This includes the redesign of the front door to

ASC, with the launch of the First Response Service in

September, utilising strengths based approaches,

along with a significantly improved IAG offer in order to

prevent, reduce and delay the need for care packages.

The Care Technology and Reablement Workstreams

are also focused on maximising independence and

managing demand.

Transition planning is now a focus, which will have a

tighter focus on referral pathways to support earlier

identification, keeping people in Warrington and not in

expensive out of area placements, and demand

management.

Some changes have been made to the interface

between the First Response and Community social

work teams to alleviate backlogs.

A strategic review of patient flows and resources

required in intermediate care is being

commissioned.Working on a pan-Cheshire basis to

secure a 'Care Academy' for the Cheshire region to

support new people into the care professions.

Depending on how the demand presents and for which

group of service users - contingency includes:

Prioritising and risk assessing need, use of local,

regional and national Market options, multi-agency

review of provision etc. Provider Market Engagement

Events, developing ASC Market Position Statement

Refresh, establishing new provider forums that seek to

understand market pressures better and work with

skills for care regarding external market workforce

planning.

SRR 1b

SP

Am

an

da

Am

esb

ury The Council is unable to manage the increasing

demand for children's social care services,

resulting in additional financial pressures and

potentially unmanaged reductions in service

provision.

12 3 4 12 121

Children's Services have established a Children in

Care demand management programme with

operational activities to manage, prioritise and track

fluctuations and changes in demand effectively, whilst

safely reducing the number of children in care. The

group report to the OBB Board.

Families First – The Edge of Care Service are

supporting this work by providing a range of support to

parents and carers alongside support to Warrington’s

in house residential children’s homes. The Families

First service is also working to reduce the number of

children on the Edge of Care and safely reduced the

number of children subject to Child Protection Plans by

providing a comprehensive range of support including

a respite care offer. Early help has established a first

response team at the front door with the aim being that

this service will direct referrals away from children’s

social care and into early help (where appropriate).

Children's Services will be linking into the benefits

realisation work undertaken by Adult Services to

ensure that there is a coordinated approach to demand

management across the directorate.

Depending on how the demand presents and for which

group of service users - contingency includes:



review of provision etc.

SRR 1c

SP

Pau

la W

ort

hin

gto

n The Council is unable to manage the demand on

the high needs budget leading to a considerable

overspend.

16 4 4 16 161

Early help has established a first response team at the

front door with the aim being that this service will direct

referrals away from children’s social care and into early

help (where appropriate). A robust governance

framework has been established to monitor the

demand on the high needs budget and the spend. A

finance group has been established as a sub group of

the SEN Review Board to come up with mitigations to

manage the overspend situation.

A SEN review to take place. Interventions from the

iMPOWER work to be implemented with key Education

and LA colleagues. A refreshed early identification and

early help offer is being developed with Health

colleagues. A review of external placements to be

completed. An in house 19-25 provision to be

developed. A new 19-25 offer is under development.

The transition service is being implemented to deliver a

14-25 offer to reduce spend on external placements

and improve the early identification of high cost YP and

improve the transition between Children's and Adults.

There is already a predicted overspend on the high

needs budget. Conversations will need to take place

with colleagues in Schools and the CCG regarding joint

solutions. Contingency includes the creation of a SEN

Commissioning post. A revision of the Top Up bands.

A review of all current transport arrangements.

STRATEGIC RISK REGISTER - QUARTER 2

Control StrategyRisk AssessmentReference / Ownership

Imp

act

Q2

Dir

ec

tio

n o

f

Tra

ve

l

Risk Description

Ris

k N

um

ber

Str

ate

gic

Lea

d

Lea

d O

ffic

er

Ori

gin

al

SM

T

Sc

ore

Lik

eli

ho

od

Q2

Qu

art

erl

y S

co

re

Q1

Qu

art

erl

y S

co

re

Q2Item 6

291

APPENDIX 1



Contingency Plans



potential risk)



potential risk)





Imp

act

Q2

Dir

ec

tio

n o

f

Tra

ve

l

Risk Description

Ris

k N

um

ber

Str

ate

gic

Lea

d

Lea

d O

ffic

er

Ori

gin

al

SM

T

Sc

ore

Lik

eli

ho

od

Q2

Qu

art

erl

y S

co

re

Q1

Qu

art

erl

y S

co

re

Q2

SRR 2

SP

Cath

eri

ne

Jo

ne

s The local social care market, particularly services

for adults, becomes unstable, leading to difficulties

in meeting assessed need.

16 3 4 12 121

This is a national issue and we monitor closely the

fluctuations and changes in need and capacity of the

local markets for domiciliary, residential, nursing,

supported living and other services. Monitoring takes

place at least weekly and in some areas daily.

Commissioners, operational managers, partners and

providers work closely to maintain sufficiency that can

meet need and provide appropriate choices that meet

statutory requirements. There are a number of fora

established including providers and partners to review

and monitor how sufficiency and quality is maintained

in key areas. When markets show signs of stress or

difficulty there are efforts to provide support, incentives

and re commissioning to reduce pressure. We have

agreed a significant uplift in rates for domiciliary care

providers and our capacity has significantly increased

with very few hours now waiting for allocation. Our

residential and nursing care market is also now more

stable due to agreed provider increases and active

monitoring of placement availability. We also have

increased the availability of nursing EMI placements

which has been a particular area where capacity has

been low.

Maintain regular reviews of sufficiency and quality in

the social care sector working closely with partners and

providers to create more sustainable arrangements.

Market management activities continue to ensure

providers are supported and challenged appropriately

to ensure the market can meet need in a timely and

appropriate way. We are also developing a refreshed

market position statement which will give providers a

full assessment of our market needs allowing them to

plan and develop services more proactively where we

have gaps or shortages.

Depending on which sector is unstable affecting which

group/s of service users - contingency includes:



review of provision, price review etc.

SRR 3

SP

Cath

eri

ne

Jo

ne

s /

Am

an

da

Am

esb

ury A failure in safeguarding services results in the

death of, or significant injury to, a vulnerable adult

or child.

12 3 4 12 121

Existing controls to mitigate a failure in safeguarding

services include regular and effective management

oversight and supervision, workforce planning

arrangements to ensure that caseloads are

manageable, quarterly audits of children's casework

undertaken by both the local Adults and Children's

safeguarding boards and the Safeguarding Quality

Assurance Teams; and commissioning, procurement

and contract management arrangements.

Maintenance of current controls and implementing

recruitment and retention strategy to ensure that

caseloads are manageable.

Review of adult first Response Team, who respond to a

significant amount of initial safeguarding concerns with

support from specialist services to build on

responsiveness and consistency of initial assessments

and interventions. Further developed briefings in

relation to reviews and learning from practice. Review

of Adult Safeguarding model 2018-2019 to ensure

resources targeted most effectively.

Follow safeguarding adults pathway including

notification of Safeguarding Chair and decision making

regarding Safeguarding Adults Review in order to

understand cause and implement actions required to

address issues and any failure.

SRR 4

SP

Am

an

da

Am

ers

bu

y/

Cath

Jo

ne

s The Council or one of its key providers, receives a

significantly adverse inspection judgement from

the Care Quality Commission or Ofsted.

This could result in the loss of one or more key

providers, impacting the Council's ability to meet

assessed need and ultimately, the imposition of

external advisors to manage service provision on

behalf of the Council.

12 3 4 12 121

Internally regular performance and audit of activity is

benchmarked against targets and in the context of

inspection standards. This is used to inform

development and investment plans to maintain

standards. For contracted services there are regular

monitoring arrangements and escalation processes

where standards fall below expectations. In the event of

unsatisfactory CQC or Ofsted judgements there are

processes of risk assessment and then action planning

that range from support through to default and closure.

A focused inspection with good outcomes and a

positive annual conversation gives cause for some

optimism that inspection is less to be feared as

progress is being made. Additional strategic capacity

has been established in 2017/18 to lead the SEND

reform agenda and ensure compliance with the SEND

code of practice. An inspection preparation project

board had been convened around children's social care

and SEND inspections which will ensure readiness.

Focused work with partners has led to a sharp

improvement in DTOC performance nationally reducing

the risk of a CAQC focused review of patient flow.

Follow safeguarding adults pathway including

notification of Safeguarding Chair and decision making

regarding Safeguarding Adults Review in order to

understand cause and implement actions required to

address issues and any failure.

SRR 5

SP

Pau

la W

ort

hin

gto

n Ongoing educational reforms, including

academisation and the national formula funding

review, could impact on the Council's ability to

support Warrington's schools and maintain high

standards of educational performance.

9 2 3 16 6$

The Education Services School Improvement Team

identify vulnerabilities in educational performance via

the Keeping All Schools Under Review (KASUR)

Forum and respond accordingly to support the

attainment of high educational outcomes and in

readiness for Ofsted inspections. The LA is working

closely with the Teaching Schools to develop a model

of high improvement.

The re-designed School Improvement Service is in

place and continues to support the sector led approach

which we have adopted in Warrington.

Integrated services will be subject to a full service

review to ensure that it remains fit for purpose.

Integrated services is to be subject to a full service

review to ensure that it is fit for purpose

To develop a new sector led approach for school

improvement arrangements including high level

capacity to drive forward the new arrangements. The

new Head Teachers programme is to be revised and

strengthened to support our school improvement

aspirations.

292

APPENDIX 1



Contingency Plans



potential risk)



potential risk)





Imp

act

Q2

Dir

ec

tio

n o

f

Tra

ve

l

Risk Description

Ris

k N

um

ber

Str

ate

gic

Lea

d

Lea

d O

ffic

er

Ori

gin

al

SM

T

Sc

ore

Lik

eli

ho

od

Q2

Qu

art

erl

y S

co

re

Q1

Qu

art

erl

y S

co

re

Q2

SRR 6

MA

A

Dave

Cow

ley Legislative changes are operational from 3rd April

2018 and place additional demands on the Council

to manage homelessness.

20 5 4 20 201

Warrington Homelessness Strategy and Housing

Strategy.

We have implemented changes to the housing

allocations policy. We are increasing the number of

temporary accommodation, piloting New Start for rough

sleepers and working with RSLs. New Start is a

package of support and accommodation for former

rough sleepers.

The proposed changes in legislation have come with

limited additional resources to implement the changes.

There are currently challenges in staff capacity and the

availability of temporary accommodation and social

housing.

SRR 7

MA

A

Mun

a A

bd

el A

ziz

Ste

ve P

ark The Council, working with its partners, is unable to

reduce health inequalities across Warrington.

12 4 4 16 161

Warrington Health in Business Programme. Warrington

Wellbeing hub. Central Area Neighbourhood Renewal

Board.

Health in Business events, hosted through the

Business Exchange.

Will require the following interventions across council

departments and with health partners: Employer pledge

and health in business programme. Inclusive growth

programme. Social value in procurement. Warrington

Wellbeing collaborative clusters. Need to enhance

work with parish councils in the most deprived areas

outside of central.

Company engagement will introduce physical and

mental wellbeing initiatives.

The gap in employment rates for those with long term

condition or disability has been widening year on year

from 2013/14. Most recent data for 2016/17 confirm the

widening gap. ESF projects to be enhanced and

poverty reduction initiatives to be considered.

Companies will benefit from increased productivity as a

result of lower absence rates.

SRR 8

SP Warrington experiences a significant failure in the

health and social care system as a consequence

of demand pressures on key providers.

16 0 0 12 0$

Recommended for removal because this risk

duplicates SRR 1 and SRR 2.





SRR 9

MA

A

The

resa

Whitfie

ld

Tra

cy F

lute Warrington experiences a Pandemic Flu outbreak

which creates significant additional pressure on

key services at the same time as limiting our ability

to respond to those pressures.

20 4 5 20 201

Level of alert and preparedness remains high. The

WBC Corporate Flu pandemic plan has been reviewed

to reflect the latest information and response

arrangements which tie into the Resilience Forum and

national structures. Outbreak Control Plans / response

structure in place to provide immediate response

during assessment phase. Despite the level of

preparedness across the Council, Health and

Resilience Forum partners, subject to the severity of

the strain of influenza, if clinical attack rates are at a

higher level this will undoubtedly have an impact on

continuity across all services / partners. For this

reason, in the absence of any assurance of the type of

strain that could emerge, the scoring has remained the

same

Critical service level flu pandemic plans across the

organisation are to be reviewed by each Directorate

(supported by Directorate BC leads). Workshops have

been delivered across HoS to raise awareness of Flu

Pandemic impact. This work will also influence a review

of each Directorate Business Continuity Profile which

lists critical services identified by each Directorate and

prioritises recovery arrangements. Once plans are

reviewed consideration to develop an exercise to

appropriately test plans will be given.

If pandemic was declared, this would result in a Major

Incident declared which would invoke the WBC Major

Emergency Plan (MEP). Response structures outlined

within the MEP would underpin the response to a Flu

Pandemic and the management of BC implications.

Cheshire Resilience Forum has a Flu Pandemic

response plan which reflects the multi-agency

response structures outlined within the MEP. Health,

social care and education integrated flu plan for

Warrington has been developed to provide

coordination and assurance in Warrington in the event

of a pandemic.

SRR 10

S P

ark

Ian B

racke

nb

ury Warrington experiences a significant downturn in

the economy, which could impact the Council in

various ways, including:

- increasing the demand for services to support

vulnerable people and other frontline services such

as benefits, council tax support, contact centre etc.

- detrimental impacts for the performance of the

commercial estate;

- reducing the availability and/or increasing the

cost of raw materials, component parts and other

resources which in turn could affect the delivery of

the Council's major regeneration and infrastructure

projects.

12 3 4 12 121

Staff within both accountancy and property regularly

monitor the current performance of the commercial

estate and report any major variations as part of the

budget monitoring process.

The performance of the Birchwood Park estate and

delivery of key regeneration projects is closely

monitored by programme specific boards.

The OBB managing demand workstream working

alongside traditional management systems will look to

mitigate any potential impact of increased demand for

services.

Officers within the Directorate are aware of the impact

of the Carillion liquidation and the potential effect upon

main and sub contractors supporting the wider

regeneration programme. Measures and checks in

place to minimise potential effect on programmes.

Directorate Company risk register reviewed to mitigate

impact of financial hardship / liquidation on main

contractors with regard service provision / contingency

plans in place ( winter gritting)

Greater focus upon financial checks of organisations

as part of the pre procurement process with respect to

large regeneration projects and schemes.

293

APPENDIX 1



Contingency Plans



potential risk)



potential risk)





Imp

act

Q2

Dir

ec

tio

n o

f

Tra

ve

l

Risk Description

Ris

k N

um

ber

Str

ate

gic

Lea

d

Lea

d O

ffic

er

Ori

gin

al

SM

T

Sc

ore

Lik

eli

ho

od

Q2

Qu

art

erl

y S

co

re

Q1

Qu

art

erl

y S

co

re

Q2

SRR 11

D B

oyer

Mic

ha

el B

ell The Council receives a successful legal challenge

to the Local Plan which could result in a Plan being

imposed.

20 2 5 10 101

A formal Corporate Governance structure for the Local

Plan was introduced in Q3 17/18, overseen by a new

Local Plan Board comprising senior Officers from

across the Council. The Board is chaired by the

Executive Director of ERGE and comprises relevant

members from SMT together with relevant Assistant

Directors from each Directorate.

A more detailed risk assessment was undertaken in

respect of the Local Plan review. This was reported to

the Local Plan Board during Q4 2017/18.

The main risk for legal challenge is following the

adoption of the Local Plan. This could still be 2 years

away. Through the Local Plan Board it is proposed to

develop a contingency plan well ahead of the adoption

of the Local Plan.

SRR 12

D B

oyer

The

resa

Whitfie

ld Warrington experiences a major incident, which

creates significant additional pressure on key

services at the same time as limiting our ability to

respond to those pressures.

16 4 4 16 161

Subject to the type of incident and the resulting

disruption, the impact could be significant. However,

the Major Emergency Plan has been fully revised; all

risk specific plans are reviewed in line with statutory

requirements. Tiers 1-4 of the organisation have been

trained in their specific roles relating to out of hours

response arrangements. Training and exercising

continues throughout the year to build resilience and

maintain competency and awareness of response

arrangements. The Council's level of preparedness to

respond to an incident is increased through the

expansion of the out of hours cover to all tiers 1-4.

Business Continuity Profiles have been reviewed and

are on WINNIE. Subject to the type and severity of the

incident the impact on the Council's response and

continuity could be significant, for this reason the score

has remained the same.

Further campaigns to encourage additional volunteers

to undertake roles such as Emergency Centre Manager

and Rest Centre Manager are planned as a measure to

further increase resilience. Formal arrangements have

been refreshed with the majority of local hotels so that

the use of Rest Centres and the associated staffing

impacts should not be necessary for the majority of

small scale incidents.

In addition to the Major Emergency Plan the Council

has risk specific plans in place to cope with specific

events such as Flooding (Multi-agency Flood

Emergency Response Plan) COMAH (Control of Major

Accident Hazards) Plan, MAHP (Major Accident

Hazards Pipelines Plan) Mass Fatalities, Evacuation &

Shelter.

SRR 13

S P

ark

Ste

ve P

ark The Council's flagship regeneration project, Time

Square, is not delivered to time, budget or

specification.

16 4 4 16 161

The regeneration scheme is run as a controlled

programme by experienced personnel, with a number

of subgroups addressing specific work streams of the

programme all reporting to the Programme Board.

The programme maintains a risk register which is

updated quarterly. The minutes and risk register are

shared with Risk and Corporate Governance, CIPG

and SMT.

Internal audit have an open and standing invitation to

attend the programme board and do so on a regular

basis.

The construction is now out of the ground which

reduces risk and remains on programme.

There is some budget pressure as a result of the

management of the handover between construction

and operations, particularly around ICT and this is

being assessed.

The multi-storey car park opened in November but still

has some defects which we are currently dealing with

through the contract. The programme group continues

to monitor risks and identify mitigation measures as

required.

There is a risk that failure to secure restaurant

operators prior to opening of the scheme would result

in a significant revenue pressure for the Council. It is

anticipated that occupiers will start to take leases in the

12 months prior to opening. We currently monitor this

situation through the Time Square Programme Board

and the establishment of a specific group to look at

lettings and restaurant engagement.

The risk is being managed through the engagement of

appropriate agents and regular review of the process of

negotiations with potential operators.

Both WBC staff and Warrington Market could remain in

existing locations should the scheme be delayed.

Financial impacts from any failure to let would be

mitigated by finding alternative occupiers.

SRR 14

S P

ark

Ste

ve P

ark The Great Sankey Hub project was taken over by

the Council from Livewire in Summer 2017.

Having taken on this responsibility, the Council is

unable to deliver the project to time, budget or

specification.

16 5 2 16 10$

The project is now under the control of Warrington &

Co. The project is challenging as it is a refurbishment

of an existing building which itself is adjacent to an

operational high school.

A lease has been drafted for LiveWire to enable them

to take occupation and operate from the new facility.

The majority of the Hub is now open and in use with the

exception of the pool and spa.

Disruption to school exams as a result of works to the

hall are now mitigated as the hall is now operational

and available for use by the school.

Warrington & Co meet regularly with the building

contractor and the school to ensure communication

and coordination.

The risk of the pool not opening on time has been

realised and work is ongoing to resolve the outstanding

issues.

Alternative provision for pool use can be made

available.

294

APPENDIX 1



Contingency Plans



potential risk)



potential risk)





Imp

act

Q2

Dir

ec

tio

n o

f

Tra

ve

l

Risk Description

Ris

k N

um

ber

Str

ate

gic

Lea

d

Lea

d O

ffic

er

Ori

gin

al

SM

T

Sc

ore

Lik

eli

ho

od

Q2

Qu

art

erl

y S

co

re

Q1

Qu

art

erl

y S

co

re

Q2

SRR 15

LG

Hea

ther

Berr

y The Council experiences a major cyber incident. 16 4 4 16 161

Security Incident Event Management System

(Logarithm) alerts to potential threats from both

external and internal sources and is configured to

assist with PSN/PCI DSS standards.

PSN compliance with Code of Connection, verified by

annual review, including password cracking tests and

penetration testing.

Quarterly external penetration testing undertaken by

CREST/CHECK approved third party.

Quarterly penetration testing for compliance with PCI

DSS undertaken by approved third party.

ISO 27001 accreditation in place for ICT service and

primary locations. Three year certification, verified by

annual site survey and three day recertification visit.

NCSC best practice guidance is reviewed and

considered when procedures, services and systems

are designed and implemented.

The ICT Services engages with the Cyber Information

Sharing Partnership (CISP) and receives

alerts/notifications via this forum.

Our existing treatment and controls are deemed

appropriate. They have so far withstood the cyber-

attacks we have been subject to and we are constantly

looking at new and changing guidance with relevant

authorities to understand new attack types and

protection measures available: both preventative and

detection/defensive.

Business Continuity and Data Recovery Plans.

SRR 16

LG

Sara

h G

alle

ar

The Council experiences a significant breach of

information governance through failing to maintain

compliance with the General Data Protection

Regulations (GDPR) and the Data Protection Act

(DPA) 2018.

12 4 4 16 161

While the Council has training in place via elearning,

supplementary face to face sessions and dedicated

Winnie IG pages, there are still information breaches

and incidents occurring which could lead to a breach of

the DPA.

A series of scheduled GDPR introductory drop in

sessions were held between October 2017 and April

2018 with GDPR specific content on Winnie.

Data Protection and Information Governance courses

are now mandatory.

Increased awareness of breaches has seen a rise in

reporting incidents both to the IG team and for the IG

team to report to the ICO.

Maintain eLearning courses, provide additional training

for risk areas and continue to maintain IG content on

Winnie.

A GDPR elearning course will be made available as

part of the ongoing compliance work.

There are working groups in place for the key tasks

which need to be completed as part of the GDPR

compliance programme.

Full incident reporting process in place in the event of a

breach of the GDPR/DPA including scoring to ensure

that we can report within the required 72 hours.

SRR 17

SP

The

resa

Whitfie

ld The Council experiences a significant breach of

health and safety requirements which could result

in serious injuries or deaths of employees,

members, service users or members of the public.

Such a breach would result in action on the part of

the regulator (HSE) and potentially claims for

compensation also.

12 3 4 12 121

The Health & Safety Policy has been reviewed for 2018-

19 and outlines roles and responsibilities at all levels of

the organisation in addition to key roles. The policy is

based on the Health & Safety management

arrangements (HSG65) which if followed, should

ensure the organisation has adequate H&S

management arrangements in place. The ultimate

duties of the Chief Executive are delivered through

delegation and on the basis of managers managing

H&S risks. Standard Operating Procedures (SOPs) and

Guidance Notes (GNs) are in place to guide managers

to be able to comply with relevant legislation /

regulations (where applicable). Whilst assurance

through audits indicates compliance with areas tested,

not all services / buildings within the Council are

audited - there is a reliance on learning from audits

being shared and monitored through Directorate H&S

committees. As this learning is embedded, this reduces

the likelihood of a breach, however, in the event of a

breach the impact could be considerable (subject to the

nature and the level of breach identified). It was agreed

at Central Health & Safety Committee in September

2018 that all final audit reports will be shared (for the

relevant Directorate) through their Directorate

committees in addition to a "common themes" action

tracker - this will support shared learning and

implementation of improvement recommendations

across all service areas

The Team undertake the Competent Adviser role to all

LA Maintained Schools / education establishments

where the Council is the employer and has a statutory

duty to provide access to competent H&S advice. The

Team also offer the service via a SLA to all schools

(including Academies) where the Council are not the

employer. Schools are audited on an annual basis.

Subject to the assurance level, detailed on site audits

are undertaken where necessary. Reports are provided

to the Head / Governors. During 18/19 focus will be

more on Directorate audits as agreed at the Central

Health & Safety Committee. The aim will be to ensure

that audit outcomes are monitored through Directorate

H&S committees, actions arising are shared across

service areas to maximise learning and enhance H&S

management systems across the Directorates.

If a breach were to occur this would result in HSE

inspection to identify failings (if any) if evidence can't be

produced as to the adequate H&S service level

management arrangements in place (as per following

the SOPs / GNs) then the HSE would instruct

improvements - no specific contingency plans are

prepared in advance as all services are required to

consider H&S risks and ensure adequate management

systems are in place (through using SOPs & GNs). In

line with agreement at Central H&S Committee, key

learning / actions arising out of the Directorate audits

will be shared on a quarterly basis with Executive

Directors so that they have oversight of the H&S

position.

295

APPENDIX 1



Contingency Plans



potential risk)



potential risk)





Imp

act

Q2

Dir

ec

tio

n o

f

Tra

ve

l

Risk Description

Ris

k N

um

ber

Str

ate

gic

Lea

d

Lea

d O

ffic

er

Ori

gin

al

SM

T

Sc

ore

Lik

eli

ho

od

Q2

Qu

art

erl

y S

co

re

Q1

Qu

art

erl

y S

co

re

Q2

SRR 18

LG

Cla

ire H

arr

is The Council's financial position becomes unstable

because of a failure to deliver the planned

transformation programme (demand management,

commercialisation and digitalisation).

15 4 5 20 201

The Council monitors its financial position on a monthly

basis at Outcomes Based Budgeting (OBB) Board and

formally to SMT and Executive Board on a quarterly

basis. Delivery projects and savings targets are

monitored through these formal routes and also in

more detail at the project level through monthly

programme meetings.

The Outcomes Based Budgeting process is constantly

under review and was subject to new governance rules

in 2017/18. These changes have improved the ability

of OBB and SMT to have early warning signs of

potential gaps in progress that could increase the risk

of an unstable financial position in current or future

years. Due to the worsening of the financial prospects

of the Authority SMT are meeting on budget issues on

a weekly basis. Engagement of members via budget

'spotlight' sessions has begun during October.

The Outcomes Based Budgeting board is overseeing

the development of a Financial Continuity Plan as part

of its financial governance arrangements. Such a plan

represents good financial governance when resources

are stretched, however the Council also continues to

maintain a robust level of reserves that can be utilised

for short term fluctuations in financial expectations and

has confidence in current financial processes to

continue to achieve a balanced budget over the next

four year Medium Term Financial Planning cycle.

SRR 19

GH

Ga

reth

Hop

kin

s -

CS

Ste

ve P

ed

die

- F

&W

Ste

ve P

ark

/Dave

Boye

r -

ER

GE The Council is unable to maintain a sufficiently

skilled and stable workforce. To include specific

consideration of the impact of Brexit and the

potential loss of staff in services either directly

provided by the Council or where there is a close

level of interaction/inter-dependence with the

Council, such as health care or construction.

12 3 4 12 121

SMT monitors recruitment and retention on a monthly

basis via a standard report. The Council has a specific

recruitment and retention strategy for Children's Social

Workers. In addition, the Council has a number of

policies and programmes (i.e. Market Supplement

Policy, Training and Development programme) used

across the workforce.

Corporate Services DMT to hold regular discussions on

turnover and recruitment.

Renewed L&D prospectus and focus on use of the

Apprenticeship Levy.

Internally - Agency Staff Framework

SRR 20

MC

Ga

reth

Hop

kin

s -

CS

Ste

ve P

ed

die

- F

&W

Ste

ve P

ark

/Dave

Boye

r -

ER

GE The Council faces legal challenge and/or claims for

compensation because of a failure to provide

services or manage organisational change in

accordance with requirements or new

legislation/regulation.

12 3 4 12 121

Each Directorate understands requirements for

statutory services. Programme of transformation

underpinned by the OBB programme.

Transformation work to take into account protection of

any statutory services.

Risk and Insurance engaging proactively with

directorates to support the handling of complaints.

Legal/Insurance services to respond to legal challenge

and/or claims for compensation.

SRR 21

MC

Ga

reth

Hop

kin

s -

CS

Ste

ve P

ed

die

- F

&W

Ste

ve P

ark

/Dave

Boye

r -

ER

GE The Council experiences a failure in its corporate

governance arrangements. To include

consideration of partnership governance and

contract management arrangements, governing

the Council's relationships with key partners and

suppliers.

20 4 5 20 201

Code of Corporate Governance. Codes of Conduct.

Constitution. Financial Procedures. Contract Procedure

Rules. Scheme of Delegation. Anti-Fraud, Corruption

and Bribery Policies. Risk Management Policy and

Procedures.

Training to be provided via middle management forum

and leadership development forum on financial

regulations, contract regulations, council policies.

Directorate is supporting managers in F&W to

implement recommendations arising from recent

internal audit investigation.

Regulations and policies to be enforced through

disciplinary action as appropriate.

SMT has recently agreed that the MO will conduct a

review of governance arrangements including the

decision making process and the use of delegated

powers.

Urgent authorisation process in place as part of

financial regulations, with retrospective authorisation

process set out.

SRR 22

NEW

FOR Q2

SB

Matt

Cu

mbe

rba

tch

- C

S

Ste

ve P

ed

die

- F

&W

Ste

ve P

ark

/Dave

Boye

r -

ER

GE Impact of BREXIT for the Council and for

Warrington:

Potential skills shortages.

Relocation of key businesses and employers.

Reduction in investor confidence.

Uncertainty regarding UK funding to replace loss of

structural funds (Shared Prosperity Fund).

Uncertainty regarding rights of non UK EU citizens

(residency, employment, benefits and access to

public services).

Increased demand for Council services.

Impact on Council and local supply chains for

goods and services.

Transitional arrangements from EU to UK

legislation, regulations and powers.

4 4 16#

Maintain regular briefings for senior management and

members.

Continue to monitor developments and undertake

Warrington specific impact assessments as details

emerge:

Engage with key public sector partners including the

NHS and Cheshire Police.

Liaise with MHCLG preparations, including participation

in the planned regional workshops.

Risk assess contracts and supply chains and

implement mitigation plans.

Review current and ongoing procurements and

implement mitigation plans.

Engage with major suppliers, contractors and

employers.

Introduce regular briefings for middle management and

staff.

296

WARRINGTON BOROUGH COUNCIL AUDIT AND CORPORATE GOVERNANCE COMMITTEE 17 JANUARY 2019

Report of: Lynton Green, Deputy Chief Executive and Director of Corporate Services

Report Author:

Jean Gleave, Head of Internal Audit, Risk and Insurance


Telephone: 01925 442354

Ward Members:

ALL

TITLE OF REPORT: PEER REVIEW OF RISK MANAGEMENT

1. PURPOSE 1.1 The report presents the Peer Review of Risk Management Arrangements for

consideration and approval by the Audit and Corporate Governance Committee. 2. CONFIDENTIAL OR EXEMPT 2.1 The report is not confidential or exempt. 3. INTRODUCTION AND BACKGROUND 3.1 During 2017/18 the risk and insurance service participated in a peer review with

Stockport Metropolitan Borough Council. There were two main drivers for this:

The Public Sector Internal Audit Standards (PSIAS) require the head of internal audit to provide an annual opinion on the overall adequacy and effectiveness of the organisation’s governance, risk management, and control processes (i.e. the organisation’s system of internal control). Where heads of internal audit have operational responsibility for risk management, the PSIAS require that additional safeguards are put in place to ensure the independence and objectivity of the internal audit service.

The service was keen to share experience and good practice with an authority which has adopted similar organisational arrangements to those of Warrington.

3.2 Warrington’s review was conducted by the Head of Internal Audit, Risk and Insurance

and the Risk Manager for Stockport Council. Similarly the review for Stockport was

Item 7

297


undertaken by the Head of Internal Audit, Risk and Insurance and the Risk and Insurance Manager for Warrington Borough Council.

298

3.3 The reviews were conducted to a mutually agreed terms of reference and methodology. The process involved interviews with relevant officers and members, a review of risk management documentation and analysis of responses to a questionnaire circulated to a sample of members and senior managers.

4. CONCLUSIONS AND RECOMMENDATIONS 4.1 The full report is provided at Appendix 1. It concludes that the Council has well

designed risk management arrangements supported by clear documentation and guidance. Areas of good practice are highlighted and recommendations for further development are provided in the Action Plan which accompanies the report.

4.2 Since the report was finalised, we have:

Updated the Council’s policy and strategy for risk management (Recommendation 1)

Continued to support the Council’s major projects, including attendance at project board meetings and ongoing liaison with project managers (Recommendation 2)

Developed and issued detailed guidance to support the risk management policy and strategy and begun to develop an online training module for risk management (Recommendation 3)

Worked with the Families and Wellbeing Directorate to update its risk management arrangements, including the development of a directorate level risk register, and met with the new directorate management teams for Growth and Environment and Transport to discuss internal audit and risk management matters (Recommendation 4)

Continued to support and challenge directorate and senior management teams regarding the recognition and assessment of strategic risks facing the Council, as summarised in our latest quarterly update report on today’s agenda (Recommendations 5 and 6)

5. FINANCIAL CONSIDERATIONS 5.1 The review was undertaken at nil cost to the Council, other than officer time to

conduct the equivalent review for Stockport. Similarly, the recommendations are being implemented within existing resources, and will not require additional investment.

6. RISK ASSESSMENT 6.1 The Council must ensure that it has appropriate risk management arrangements in

place in order to manage its risks and maintain a sound system of internal control. 7. EQUALITY AND DIVERSITY / EQUALITY IMPACT ASSESSMENT 7.1 There are no specific equalities issues in relation to the content of this report.

299

8. CONSULTATION 8.1 N/A 9. REASONS FOR RECOMMENDATION 9.1 To ensure that the Council maintains an effective framework of internal control,

including risk management arrangements. 9.2 To assist the Council in meeting its statutory responsibility to review the effectiveness

of its systems of internal control and prepare an annual governance statement. 10. RECOMMENDATIONS 10.1 The Audit and Corporate Governance Committee is recommended to:

(i) Consider and approve the Peer Review of Risk Management Arrangements conducted by Stockport Council.

(ii) Feedback on the progress being made to implement the recommendations of the review.


(i) Terms of Reference for the Peer Review (ii) Risk Management Reports to SMT, Executive Board and the Audit and

Corporate Governance Committee Contact for Background Papers:


Alison Weir Risk and Insurance Manager

[email protected] 01925 442613

300

Warrington Borough Council

PEER REVIEW OF RISK MANAGEMENT ARRANGEMENTS UNDERTAKEN BY STOCKPORT MBC

CARRIED OUT BY

John Pearsall- Head of Audit, Risk and Insurance

James Neilson- Risk Manager

ASSESSMENT DATE: 15th May 2018 REPORT DATE: Draft: 11th June 2018 Final: 28th August 2018

Item 7

301

1. Introduction

2. Approach / Methodology

3. Conclusion: Overall Assessment

4. Observations / Recommendations

Appendix 1 Review Team Experience / Qualifications

Appendix 2 Risk Management Checklist

Appendix 3 Action Table

302

Warrington Borough Council Peer Review of Risk Management Arrangements

1. Introduction

1.1 The Public Sector Internal Audit Standards (PSIAS) note that a professional, independent and objective internal audit service is one of the key elements of good governance, as recognised throughout the UK public sector. The role of the Head of Internal Audit, Risk and Insurance (HoIA), in accordance with the PSIAS, is to provide an annual opinion, based upon (and limited to) the work performed, on the overall adequacy and effectiveness of the organisation’s governance, risk management, and control processes (i.e. the organisation’s system of internal control).

1.2 The HoIA at Warrington Borough Council (The Council) has responsibility for oversight of risk management arrangements. This is not unusual and is not forbidden by the PSIAS. However, the PSIAS require that where such responsibility lies with the HoIA safeguards must be put in place to ensure the independence and objectivity of the internal audit service is not impaired. This also enables the HoIA to provide an independent opinion, and to evidence compliance with the PSIAS.

1.3 In order to enable the necessary safeguards to be demonstrated a peer review of the risk management arrangements in place at the Council was commissioned. An independent assessor or assessment team means not having either a real or an apparent conflict of interest and not being a part of, or under the control of, the organisation to which the internal audit activity belongs. This review has been carried out by the Head of Internal Audit, Risk and Insurance and the Risk Manager at Stockport Metropolitan Borough Council (SMBC). Details of the reviewers’ relevant experience and qualifications are included at Appendix 1.

2. Scope and objectives

2.1 The review assessed the adequacy of The Council’s risk management arrangements, the overall objective was:

To provide an independent view on the adequacy of risk management arrangements which will support the HoIA to form an overall opinion on the organisation’s system of internal control.

2.2 The review was conducted by reference to a checklist (attached at Appendix 2), which was agreed by the HoIA, and was based upon the Alarm national performance model for risk management in public services and CIPFA guidance for internal auditors on assessing risk management arrangements.

2.3 Evidence to complete the checklist was drawn from:

A review of completed questionnaires.

Interviews with relevant officers and members.

303

Reviews of relevant documentation.

2.4 Interviews were conducted with the HoIA; a sample of senior managers; and the Chair of the Audit Committee.

2.5 Documents reviewed included:

Corporate plan and strategic objectives.

Risk management policy, strategy, guidance.

Strategic risk register.

Annual Governance Statement and Head of Audit Opinion for 2016/17.

Reports to Senior Management Team, Executive Board and Audit Committee.

Organisational structure and governance structure for risk management.

Reporting timetable for risk management.

3. Overall Assessment

3.1 The review team has concluded the following assessment:

The Council has well designed risk management arrangements supported by clear documentation and guidance although this requires updating. Further work should be undertaken to ensure that the Strategic Risk Register reflects the strategic risks facing the organisation and to ensure that risk management arrangements support and inform strategic decision making. Work should also continue to ensure that the risk management arrangements are embedded throughout the Council.

3.2 A summary of the areas for consideration to improve / develop the Risk Management arrangements is identified within the action table at Appendix 3.

4. Observations and Recommendations

4.1 Areas of Good Practice

4.1.1 There is a clear link between directorate risks and the Strategic Risk Register (SRR) ensuring the SRR has relevance to services and risk ownership is clear.

4.1.2 Senior officers and members are comfortable with the existing process and speak well of the RM function and the reporting they receive. This is positive feedback of which the service can build on in the future.

4.1.3 Some directorates actively discuss risks in specific meetings. This demonstrates a degree of embeddedness through the Council.

304

4.1.4 Risks are regularly discussed at DMT meetings. This highlights that risk management is taken seriously by Senior Management in the Council and is used as part of the process for informing strategic decisions. Review of Directorate level risks could be extended

4.1.5 Risks are analysed and provide a “direction of travel” which is useful guide for managers and members alike.

4.1.6 Detailed and regular risk reports are provided to Audit Committee, in line with good practice around risk management processes.

4.2 Areas of Improvement

4.2.1 The Risk Management Strategy and associated guidance was last fully revised in 2014 with subsequent minor updates. Whilst fundamentally sound, the Council operates in a different environment now. Management have already acknowledged a full refresh of the strategy and associated guidance and processes is due. (See Recommendation 1 in Appendix 3, below).

4.2.2 In our experience, risk management can be most effective when there is an active presence in all key stages of the project cycle including inception/business case, evaluation and delivery phases. Depending on the governance arrangements for any given project, this would most likely be achieved through membership and regular attendance at periodic project boards. . (See Recommendation 2).

4.2.3 The initial scoring of risks by services is inconsistent. The RM function have to, with SMT’s approval, arbitrate risk scoring. This indicates not all services understand and apply the RM process consistently. (See Recommendation 3)

4.2.4 We understand that risk management is not as formally embedded across all services. Whilst the risk profile of some services may not require such formality, we would suggest that all services with higher rated risks include some periodic review at Directorate and /or service management team meetings. (See Recommendation 4).

4.2.5 Consideration should be given to the risks around partnership working with other bodies and also the supply chain risk, particularly in light of recent issues with large public sector service providers. (See Recommendation 5).

4.2.6 The SRR helpfully includes reference to the different control measures for each risk and also where the Council should be obtaining assurance from on the effectiveness of those controls. However, there is not much evidence presented as to whether those controls are actually impacting on the risk level and therefore, effective. For example, the flu epidemic risk is still highly rated despite significant resource being utilised to mitigate it. If controls do not in fact lead to the risk likelihood or impact diminishing, the Council should question the effectiveness of the use of those resources. (See Recommendation 6).

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Appendix 1

Review Team

John Pearsall CMIIA John is a fully qualified member of the Chartered Institute of Internal Auditors and is currently a tutor, examiner and moderator for the Institute. He is also currently Head of Internal Audit, Risk and Insurance at Stockport Metropolitan Borough Council with responsibility for internal audit, risk management and insurance services. John has over 25 years of internal audit, governance, control and risk experience in both the public sector (three local councils) and the private sector (pharmaceuticals, retail and financial services).

James Neilson

James is an experienced public sector internal and external auditor and qualified accountant. He currently manages risk for Stockport Council. His previous employers include PwC and the Audit Commission.

306

Appendix 2

Reviewing Risk Governance Arrangements

Ref Question Response and Supporting Evidence

1 Leadership

1.1 How do the Board / Leadership Team demonstrate leadership in risk management?

1.2 Has the Board / Leadership Team determined the level of risk it is prepared to accept? Sometimes called the risk appetite.

1.3 Has a lead member or member of the Board been identified for risk management?

1.4 Has a senior officer responsible for risk management been identified and is their role clearly defined?

1.5 Does the senior officer responsible for risk management report directly to the Board on risk management matters?

2 Policy and Strategy

2.1 Is there a policy/strategy for risk management which describes the organisation’s risk appetite, culture and philosophy?

2.2 Is there a risk management framework in place which describes how risks should be identified, assessed, controlled, monitored and reported?

2.3 Are operational risk management arrangements prescribed and documented?

2.4 Is compliance with risk management processes assessed and reported to senior officers and those charged with governance?

3 Structures, Roles and Responsibilities

3.1 Has a Risk Committee or Corporate Risk Group been established?

3.2 Is the role of the Risk Committee / Corporate Group to advise and support those responsible for risk mitigation or does it have any executive responsibilities to determine risk mitigation?

3.3 What body is charged with challenging and scrutinising risk management arrangements? Do non-executives (where applicable) undertake a challenge role?

3.4 What body is charged with reviewing the effectiveness of risk mitigation

307

Ref Question Response and Supporting Evidence

strategies / actions?

3.5 What is the role of the audit committee in relation to risk management?

3.6 Do risk management arrangements also cover partnerships?

4 Accountability and Transparency

4.1 Who is accountable for the effectiveness of risk management arrangements?

4.2 Is accountability for effective risk management embedded within the performance framework of the organisation?

4.3 How does the organisation account to those charged with governance for the effectiveness of risk management arrangements?

4.4 Have sources of assurance for the Board concerning the management of strategic risks been identified?

4.5 Does the organisation communicate and share its strategic risks with its major partners and stakeholders?

4.6 Is the organisation transparent to the public about its major strategic risks?

4.7 Are risk assessments supporting major decisions made publically available?

5 Effectiveness of Risk Management

5.1 Does the audit committee have an up to date understanding of the strategic risks facing the organisation?

5.2 Has strategic risk management been clearly integrated with the organisation’s objectives and performance framework?

5.3 Has the risk appetite been communicated effectively and does it influence the management of risk throughout the organisation?

5.4 What are the arrangements for embedding good risk management practice and ensuring that members and officers are equipped with appropriate awareness, knowledge and experience of risk management?

5.5 How often is the effectiveness of risk management arrangements reviewed?

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Appendix 3

The Council Internal Audit Service – Risk Management Action Table

The following points for consideration to develop the Risk Management arrangements arise from the review undertaken:

Rec No. Points for Consideration Responsible Action

1 Issue

The Risk Management Strategy and associated guidance was last fully revised in 2014 with minor subsequent updates. Whilst fundamentally sound, the Council operates in a different environment now. Management have already acknowledged a full refresh of the strategy and associated guidance and processes is due.

Recommendation

RM documentation and processes are updated for the current risk appetite and exposure of the Council, its ambitions and objectives and significant development projects.

Insurance, Risk and Counter Fraud Advisor

Agreed. Review underway - delayed to take account of this review. Revised draft of policy now in place.

September 2018

2 Issue

309


In our experience, risk management can be most effective when there is an active presence in all key stages of the project cycle including inception/business case, evaluation and delivery phases.

Recommendation

Depending on the governance arrangements for any given project, this would most likely be achieved through membership and regular attendance at periodic project boards.

Head of Audit, Risk and Insurance

This will be considered for each major project and resource availability assessed.

Ongoing

3 Issue

The initial scoring of risks is inconsistent, especially between services. The RM function has to, with SMT’s approval arbitrate risk scoring. This indicates not all services understand the RM process, especially as it relates to prioritising.

Recommendation

RM has plans to update the training process as part of an overall refresh. We suggest one area of focus it the risk rating and prioritisation.


Agreed. Looking to incorporate a training refresher into the Council’s e-learning system, once the strategy and guidance documentation have been updated.

March 2019

4 Issue

We understand that risk management is not as

310


formally embedded across all services. Whilst the risk profile of some services may not require such formality, we would suggest that all services with higher rated risks include some periodic review at Directorate and /or service management team meetings.

Recommendation

As part of the refresh of RM. the team should work within directorates to determine what the best approach to risk updates and sharing should be in each directorate.



Agreed. Looking to work with Head of Finance to incorporate risk management updates into an overall finance report to all DMTs.

Working with directorates on directorate level risk registers and escalation to strategic risk register where necessary.

March 2019

5 Issue

Consideration should be given to the risks around partnership working with other bodies and also the

311


supply chain risk, particularly in light of recent issues with large public sector service providers.

Recommendation

Ensure the summer risk refresh includes some form of PEST analysis or similar, This should highlight external risks, for example those that arise from our relationships with partners and suppliers, which better encompasses the whole of the Council’s activities.



This will be emphasised as part of the risk refresh and associated training. The issues are considered by DMTs and SMT on a regular basis, but to date, have been included in the SRR economic and governance risks.

March 2019

6 Issue

The CRR helpfully includes reference to the different control measures for each risk and also where the Council should be obtaining assurance

312


from on the effectiveness of those controls. However, there isn’t much evidence presented as to whether those controls are actually impacting on the risk level and therefore, effective. For example, the flu epidemic risk is still highly rated despite significant resource being utilised to mitigate it. If controls don’t in fact lead to the likelihood or impact of the risk diminishing, the Council should question the effectiveness of the use of those resources.

Recommendation

SMT, as risk owners needs to ensure that risk mitigation activities are effective and be able to demonstrate this. Where risk scores do not move, justifications should be documented.


Agreed and these types of issues are covered in the risk management reports to SMT and Executive Board.

However more formal engagement with DMTs (rec 4) together with refreshed guidance (rec 1) and training (rec 3) may help to address this issue.

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WARRINGTON BOROUGH COUNCIL AUDIT AND CORPORATE GOVERNANCE COMMITTEE 17 JANUARY 2019 Report of the: Deputy Chief Executive and Director of Corporate Services Report Author: Lynton Green, Deputy Chief Executive and Director of Corporate

Services Contact Details: Email Address:

[email protected] Telephone: 01925 443925

Ward Members:

All

TITLE OF REPORT: PROGRESS REPORT OF THE OFFICER GOVERNANCE GROUP 1. PURPOSE OF THE REPORT 1.1 The purpose of the report is to brief the Audit and Corporate Governance Committee

on the work undertaken by the Officer Governance Group in relation to corporate governance for the year 2018/19. The report also details the progress against the Group’s improvement action plan and focus areas for 2018/19.

1.2 The report provides information that will allow members:

to receive assurance that the Governance Group provides adequate and effective challenge and scrutiny to the Strategic Management Team (SMT) in respect of the governance and risk management arrangements of the Council;

to consider and approve the Council’s Annual Governance Statement with a full understanding of the risks the Council faces and what it is doing to reduce these risks; and

to demonstrate that those charged with governance have a full understanding of management’s processes with regard to governance and risk management arrangements and internal control.

2. CONFIDENTIAL OR EXEMPT 2.1 Not confidential. 3. CODE OF CORPORATE GOVERNANCE 3.1 The Council has in place a local Code of Corporate Governance. The most recent

version of that Code was approved by this Committee in May 2018. The Code is consistent with the principles set out in the CIPFA/SOLACE Framework 2007: Delivering Good Governance in Local Government, the revised guidance note issued in November 2012, and the governance requirements of the 2010 CIPFA statement

Item 8

315

on the: Role of the Chief Financial Officer in Local Government. The Officer Governance Group operates in accordance with these principles

4. WORK UNDERTAKEN Terms or Reference/ Sub Groups 4.1 The Group has held meetings in July, October and January during 2018/19 in advance

of Audit and Corporate Governance Committee meetings. The Group reviewed and refreshed the terms of reference and membership at its October 2018 meeting. The Group has received updates from the Corporate Risk and Business Continuity group and the Information Governance group together with other assurance providers in accordance with the framework of assurance.

Corporate Governance Improvement Planning 4.2 The Group’s improvement action plan includes actions that continue to be monitored

by the Group. The Group continue to ensure that robust governance arrangements are ‘embedded’ into the culture of the organisation. Any further areas for improvement are also considered and are incorporated into the Group’s improvement action plan as required.

Assurance Gathering 4.3 The Group have mapped out the sources of assurance that they wish to receive to

ensure that the Annual Governance Statement for 2018/19 is fully supported. The Group review the strategic risk register to inform the assurances that they look to receive.

5. IMPROVEMENT ACTION PLAN AND FOCUS FOR 2018/19 5.1 Four significant governance development areas were included in the Annual

Governance Statement for 2017/18 and the updated position is as follows: 5.2 Budget/Savings Programme /Council Transformation/Commercialism -

The Council continues to operate both diligent and prudent financial management. Members have held budget spotlight session with officers since October 2018 and are fully appraised of the financial situation. SMT are meeting on a weekly basis and the Head of Finance is providing weekly financial updates to the Section 151 Officer in advance of weekly discussions with the Chief Executive. The Chief Executive has issued a memo detailing measures that SMT are signed up to and the Chief Executive is actively monitoring these actions.

5.3 Information Governance and Cyber Risks - Ongoing maintenance of the information governance framework and compliance with the General Data Protection Regulation and Data Protection Act 2018 is a key focus area of the Senior Information Risk Owner, Information Governance Group and the Information Governance Team.

5.4 There is mandatory training for all staff and new starters in place (re-launched 30th

October 17) and covers three key areas:

316

Information Governance Introduction to Information Security Data Protection

5.5 As at January 2019 the Council formally reported three breaches to the Information Commissioner’s Office during 2018; two incidents remain open and one incident was closed without any further action. The Council also contacted the Information Commissioner to obtain guidance on a further breach and were informed that it did not require formally reporting.

5.6 Cyber-attack is recognised as a key risk to the Council. We believe that the steps we

are taking will further enhance our governance arrangements and are satisfied that these steps will continue to improve the processes in place in line with compliance requirements such as the Data Protection Act 2019 and General Data Protection Regulation.

5.7 Progress in implementing the Cyber Security Development Programme is being

prioritised. Accreditation under the Government’s Cyber Essentials Scheme is also being explored and discussions are continuing regarding the potential purchase of a cyber liability policy.

5.8 Project Governance - Work continues to maintain robust performance monitoring

and reporting mechanisms for all major projects. Capital Investment Planning Group (CIPG) meet monthly and progress against capital schemes is reported to each CIPG meeting. CIPG ensure key reports and decisions are scheduled appropriately. The Environment and Transport Directorate operate a sub group of CIPG which reports regularly into the CIPG meetings.

5.9 The Time square regeneration scheme is run as a controlled programme by experienced personnel, there are also a series of subgroup projects addressing specific work streams of the programme. The programme carries a risk register which is updated regularly, the programme group meets every fortnight. The Great Sankey Hub project is now under the control of Warrington & Co, who hold weekly project meetings.

5.10 Resources have been allocated from the Finance team to monitor and maintain

control of the Council’s loans programme. 5.11 Health & Social Care - Warrington has submitted its Integration /Better Care Fund

Plan for 2017-2019 which sets out the case for change and its plans for implementing integration through supporting the development of an Accountable Care Partnership (ACP). The plans include how additional ‘improved Better Care Funding’ (iBCF) will be utilised to support whole system change particularly pressures in NHS services and adult social care. The plan has been fully approved by NHS England. Quarterly returns are being submitted to both NHS England and the Department for Communities and Local Government (DCLG). A BCF Steering Group meets monthly to monitor the

317

detailed delivery of the plan with high level monitoring through the Integrated Commissioning and Transformation Board meeting on a bi-monthly basis.

5.12 BCF Governance arrangements are subject to review and ratification at the January

and February 2019 BCF Steering Group meeting due to change in lead officer. Performance monitoring and financial tracking mechanisms have been strengthened and are more transparent to support partnership working and most effective use of iBCF resources to manage demand. All steering group partners signed up to planned changes. Development of the Frailty Storyboard by the CCG and Commissioning Prospectus has identified key factors across the health system which impact on service delivery and can be addressed through Warrington Together.

6. CONTINUED AREAS OF FOCUS FOR 2018/19 6.1 Improved partnership working arrangements - The changing nature of the Council’s

business means that partnership working including: work with the Cheshire and Warrington Enterprise Partnership; new commercial developments; and complex contracts for delivery of services, continue to increase. It is recognised that as such arrangements develop, then robust financial management and monitoring of the arrangements needs to be in place. The strength of the Council’s governance processes and systems around commercial schemes is best evident by the Council being one of the first councils to adopt and publish, from 1st April 2018, a Capital Strategy that fully complies with the latest MHCLG Investment Guidance published in January 2018.

6.2 High standards of conduct & personal behaviour of members and staff - work has continued to remind members and officers of the requirements to declare interests as appropriate. The Code of Conduct has been revised and an action plan is in place to improve the arrangements in place for gifts and hospitality.

6.3 Client Finances - Work is underway by the Client Finances team to address any outstanding actions from the Office of the Public Guardian assurance visit and the internal audit work.

6.4 Impact of Brexit - The Monitoring Officer has an overall responsibility to provide the Council with legal advice on the implications of Brexit as they emerge. The strategic risk register (SRR) notes at SRR risk 10 (downturn in the economy) and SRR risk 19 (retain skilled and stable workforce) reference to potential risks related to Brexit.

6.5 The Group’s improvement action plan notes deadlines for all actions as the end of

March 2019 in order for the Group to assess progress during the financial year. Updated actions will then be used to inform the Annual Governance Statement for 2018/19 and any areas of significance will be highlighted in the Statement.

7. FINANCIAL CONSIDERATIONS

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7.1 Effective governance and risk management procedures have a positive impact on the Council’s financial position and facilitate sound decision making.

8. RISK ASSESSMENT 8.1 The Council is under a statutory obligation to ensure that it has appropriate

corporate governance arrangements in place in order to maintain a sound system of internal control (as set out in Part 2 of The Accounts and Audit Regulations 2015).

8.2 A key requirement for the Audit and Corporate Governance Committee in order for

the Committee to meet its Terms of Reference is to monitor and review the Council’s Corporate Governance arrangements.

9. EQUALITY AND DIVERSITY/EQUALITY IMPACT ASSESSMENT

9.1 The work carried out by the Group is identified through review of risks on the

strategic risk register and a regular risk assessment process. This is carried out using an established methodology that is designed to show that all potential areas are considered fairly.

10. CONSULTATION

N/A 11. REASONS FOR RECOMMENDATIONS 11.1 To ensure that members have an appropriate level of assurance of the governance work being carried out and its outcomes for the Council. 11.2 To ensure that the members of the Audit and Corporate Governance Committee are able to fulfil their obligations under the CIPFA/SOLACE framework. 11.3 To assist the Council in meeting its statutory requirement to review the effectiveness

of its systems of internal control and prepare an annual governance statement (section 6 of The Accounts and Audit Regulations 2015).

12. RECOMMENDATION 12.1 That the Audit and Corporate Governance Committee considers and notes this report

as part of its monitoring role. 13.

BACKGROUND PAPERS CIPFA/SOLACE 2007 revised Framework: Delivering Good Governance in Local

Government.

319

CIPFA / SOLACE Delivering Good Governance in Local Government: Addendum and guidance note November 2012

CIPFA / SOLACE Delivering Good Governance in Local Government: updated guidance April 2016

Code of Corporate Governance May 2018 Governance Group papers and action plans.



Lynton Green [email protected] 01925 443925

320

WARRINGTON BOROUGH COUNCIL AUDIT AND CORPORATE GOVERNANCE COMMITTEE – Date 17th January 2019 Report of the:

Director of Corporate Services

Report Author: Mark Watkins Exchequer Manager, Benefits & Exchequer Services


Telephone: 01925 442232

Ward Members:

N/A

TITLE OF REPORT: WRITE OFF OF UNRECOVERABLE DEBT

1. PURPOSE 1.1 To advise Members of the amount of unrecoverable debt required to be written off

during the past six months. The write-offs were submitted for approval during the period from 1.4.18 to 30.9.18.

1.2 To advise Members of the age profile of the debts written off. 2. CONFIDENTIAL OR EXEMPT 2.1 The paper contains no information that is deemed confidential or exempt. 3. INTRODUCTION AND BACKGROUND 3.1 The Benefits & Exchequer Service is responsible for the billing, collection and recovery of

the majority of the Council’s income. On an annual basis, this includes £114m in Council Tax, £111m in Business Rates, £63m in miscellaneous income and £2m in Housing Benefit overpayments.

3.2 Collection performance remains extremely good; however, there are occasions where

we are unable to pursue an outstanding debt any further. This could occur for a number of reasons, e.g. the person owing the debt has passed away, has left the Borough

Item 9

321

without trace, a Company has been dissolved or gone into liquidation or the debt is no longer economically viable to pursue.

3.3 Where such circumstances occur, and all avenues of recovery have been exhausted, the

debts are referred to the Director of Corporate Services on a periodic basis, with a recommendation to write off the debt. These referrals are undertaken with the approval of an Assistant Director from the Directorate where the debt originated. The Director of Corporate Services (under authority delegated to the Section 151 Officer for the Council), then authorises the debts for write off as appropriate.

4. DEBT WRITTEN OFF DURING THE CURRENT FINANCIAL YEAR Period Covered April – September 2018 4.1 Housing Benefit Overpayments (including Discretionary Housing Payments):

Council Tenants £7,745.19

Private Tenants £47,815.32

Discretionary Housing Payment

£1,427.47

Total £56,987.98

4.2 Social Care Debt As can be seen in the Miscellaneous Income schedule at 4.3 below we have continued to

work closely with the senior management team to pro-actively identify those cases that we have no option than to write off.

We have also continued to worked closely with our in house legal team who have now established an arrangement with an external specialist legal team to assist with the pursuit of more complex debts e.g. property held overseas.

We have also recently created a new invest to save post to work pro-actively on debt recovery in this area.

We can also confirm (as has been covered in the media recently) we do hold charges

against properties for incurred and ongoing social care debts. 4.3 Miscellaneous Income

322

Date Submitted

Debtor Type No Of

Debts Net Value VAT Total Value

Authorising Officer Date Of

Approval Date Of

Write Off

21/06/2018

Social Services - Steve Peddie

47 £ 22,147.34 £ - £ 22,147.34

Lynton Green

21/06/2018 22/06/2018

02/05/2018

General Sundry Debts

16 £ 2,947.83 £ - £ 2,947.83

Lynton Green 23/05/2018 24/05/2018

02/05/2018

Small Balance Write off's

34 £ 56.05 £ - £ 56.05

Gemma Woodfield 25/05/2018 25/05/2018

04/06/2018


13 £ 24,791.50 £ 60.28 £ 24,851.78

Lynton Green 21/06/2018 22/06/2018

21/06/2018 Market Debt - Andy Ward

31 £ 21,577.45 £ - £ 21,577.45 Lynton Green 21/06/2018 22/06/2018

21/06/2018


9 £ 15,368.90 £ - £ 15,368.90

Lynton Green 21/06/2018 22/06/2018

21/06/2018

Social Services - Cath Jones

10 £ 3,260.98 £ - £ 3,260.98

Lynton Green 21/06/2018 22/06/2018

31/07/2018


15 £ 5,229.87 £ - £ 5,229.87

Lynton Green 13/08/2018 16/08/2018

31/07/2018


11 £ 2,202.95 £ 452.25 £ 2,355.20

Lynton Green 13/08/2018 16/08/2018

08/08/2018


18 £ 15.64 £ - £ 15.64

Gemma Woodfield 08/08/2018 08/08/2018

28/08/2018


1 £ 0.01 £ - £ 0.01

Gemma Woodfield 28/08/2018 28/08/2018

26/09/2018


26 £ 23,772.63 £ - £ 23,772.63

Lynton Green 17/10/2018 19/10/2018

26/09/2018


23 £ 13,668.76 £ - £ 13,668.76

Lynton Green 17/10/2018 19/10/2018

Grand Total

254 £ 135,039.91 £ 512.53 £ 135,552.44

4.4 Business Rates (NDR) Total Invoices 120 Total Written Off - £372551.90

323

5. AGE PROFILE OF DEBTS WRITTEN OFF 5.1 Following a previous request further analysis is now provided showing the age and type

of debt being written off. This is included as Appendix 1.

Housing Benefit

Overpayments

Less than 1

Year Old

Debt

1-2 Year Old

Debt

2-3 Year Old

Debt

2-3 Year Old

Debt

4-5 Year Old

Debt

Over 6 Year

Old DebtGrand Total

Council Tenants £7,745.19 £7,745.19

Private Tenants £8.69 £7,389.23 £19,711.26 £8,091.28 £2,342.02 £10,272.84 £47,815.32

DHP £190.87 £468.67 £160.00 £557.93 £50.00 £1,427.47

Total £199.56 £7,857.90 £19,871.26 £8,091.28 £2,899.95 £18,068.03 £56,987.98 5.2 Miscellaneous Income:

Debtor Type Less Than A Year Old

Debt

1 - 2 Year Old Debt

2 - 3 Year Old Debt

3 - 4 Year Old Debt

4 - 5 Year Old Debt

5 - 6 Year Old

Debt

Over 6 Years Old

Debt Grand Total


£3,423.03 £6,081.07 £21,660.39 £2,735.45 £963.00 £839.72 £33,593.68 £69,296.34

Market Debt - Andy Ward £456.93 £631.67 £4,404.50 £16,084.35 £21,577.45


£347.44 £9.33 £4.03 £1.00 £2.00 £1.00 £6.90 £371.70


£8,728.30 £4,382.81 £9,048.50 £22,159.61

Social Services - Steve Peddie £8,082.51 £6,644.69 £5,755.50 £1,664.64 £22,147.34

Grand Total £20,581.28 £17,574.83 £36,468.42 £5,032.76 £5,369.50 £840.72 £49,684.93 £135,552.44

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5.3 Business Rates

Debtor Type

Less Than A Year

Old Debt

1 - 2 Year Old Debt

2 - 3 Year Old Debt

3 - 4 Year Old Debt

4 - 5 Year Old Debt

5 - 6 Year Old Debt

Over 6 Years Old

Debt Grand Total

Business Rates (NDR)

£5,302.95 £50,093.37 £134,721.23 £90,452.48 £42,668.79 £22,658.75 £26,654.33 £372,551.90

Grand Total

£5,302.95 £50,093.37 £134,721.23 £90,452.48 £42,668.79 £22,658.75 £26,654.33 £372,551.90

6. RECOMMENDATION

6.1 Members are asked to note

a) The debt approved for write-off under delegated procedure by the Director of Finance and Information Services.

7. BACKGROUND PAPERS No background papers

325

Appendix 1

Period Covered April 2018 to September 2018

Volume of Debt per Service Area

Debtor Type Grand Total

-£0.00 to -

£200.00

£0.00 to

£99.99

£100.00 to

£199.99

£200.00 to

£499.99

£500.00 to

£999.99

£1,000.00 to

£1,999.99

£2,000.00 to

£4,999.99

£5,000.00 to

£9,999.99

£10,000.00 to

£14,999.99

General Sundry Debts 75 2 13 13 30 5 1 8 3

Market Debt - Andy Ward 31 5 17 1 2 3 1 2

Small Balance Write off's 53 53


48 1 11 6 16 10 3 1

Social Services - Steve Peddie 47 6 4 10 25 2

Grand Total 254 3 88 40 57 42 9 10 2 3

Volume of Invoices vs Age of Debt

Years Old Debt Grand Total

-£0.00 to -

£200.00

£0.00 to

£99.99

£100.00 to

£199.99

£200.00 to

£499.99

£500.00 to

£999.99

£1,000.00 to

£1,999.99

£2,000.00 to

£4,999.99

£5,000.00 to

£9,999.99

£10,000.00 to

£14,999.99

Less Than A Year Old Debt 86 3 43 9 18 10 3

1 - 2 Year Old Debt 56 22 8 12 10 2 2

2 - 3 Year Old Debt 41 4 4 12 14 1 5 1

3 - 4 Year Old Debt 15 2 2 5 6

4 - 5 Year Old Debt 10 4 3 1 1 1

5 - 6 Year Old Debt 3 1 1 1

6 - 7 Years Old Debt 21 7 7 4 1 1 1

7 - 8 Years Old Debt 9 2 7

8 - 9 Years Old Debt 6 1 3 1 1

9 - 10 Years Old Debt 1 1

10 - 11 Years Old Debt 3 1 1 1

Item 9

327

11 - 12 Years Old Debt 2 1 1

15 - 16 Years Old Debt 1 1

Grand Total 254 3 88 40 57 42 9 10 2 3

Sum Value of Debt Written Off Vs Age of Debt

Years Old DebtGrand

Total

-£0.00

to -

£200.00

£0.00 to

£99.99

£100.00

to

£199.99

£200.00 to

£499.99

£500.00 to

£999.99

£1,000.00

to

£1,999.99

£2,000.00

to

£4,999.99

£5,000.00

to

£9,999.99

£10,000.00

to

£14,999.99

Less Than A Year Old Debt£20,581.28 £88.24 £831.08 £1,251.77 £5,849.35 £7,380.83 £5,180.01

1 - 2 Year Old Debt £17,574.83 £524.00 £1,030.17 £3,772.44 £5,678.39 £2,344.83 £4,225.00

2 - 3 Year Old Debt £36,468.42 £70.08 £500.44 £3,328.48 £8,293.05 £1,100.54 £13,175.83 £10,000.00

3 - 4 Year Old Debt £5,032.76 £92.67 £222.91 £1,444.34 £3,272.84

4 - 5 Year Old Debt £5,369.50 £128.00 £837.00 £940.00 £1,044.50 £2,420.00

5 - 6 Year Old Debt £840.72 £1.00 £210.00 £629.72

6 - 7 Years Old Debt £12,391.71 £142.07 £871.72 £1,271.92 £1,094.20 £3,664.40 £5,347.40

7 - 8 Years Old Debt £881.71 £1.90 £879.81

8 - 9 Years Old Debt £3,005.93 £0.90 £446.71 £258.32 £2,300.00

9 - 10 Years Old Debt £1.00 £1.00

10 - 11 Years Old Debt £7,392.20 £1.00 £1,315.70 £6,075.50

11 - 12 Years Old Debt £12,827.02 £251.50 £12,575.52

15 - 16 Years Old Debt £13,185.36 £13,185.36

Grand Total £135,552.44 £88.24 £1,793.70 £5,203.53 £17,223.35 £26,194.83 £12,079.78 £25,785.23 £11,422.90 £35,760.88 Profile of NNDR write offs

Reason Balance

Administrative Receivership £12,047.84

Bankrupt £6,755.75

Company Dissolved £196,054.34

Debtor in prison £805.94

Deceased £7,895.00

Foreign Address £5,221.92

Gone Without trace £69,301.51

Liquidation £74,149.11

Statute Barred £320.49

Grand Total £372,551.90

328

WARRINGTON BOROUGH COUNCIL AUDIT AND CORPORATE GOVERNANCE COMMITTEE – Date 17th January 2019 Report of the:

Director of Corporate Services

Report Author: Mark Watkins Exchequer Manager, Benefits & Exchequer Services


Telephone: 01925 442232

Ward Members:

N/A

TITLE OF REPORT: WRITE OFF OF UNRECOVERABLE COUNCIL TAX DEBT

1. PURPOSE 1.1 To advise Members of the amount of unrecoverable council tax debt required to be

written off. 2. CONFIDENTIAL OR EXEMPT 2.1 The paper contains no information that is deemed confidential or exempt. 3. INTRODUCTION AND BACKGROUND 3.1 The Benefits & Exchequer Service is responsible for the billing, collection and recovery of

Council Tax. On an annual basis this equates to £114m. Collection performance remains extremely good. In 2017-18 collection was 96.92%.

3.2 All Council Tax debt is considered recoverable and the Service makes all necessary

efforts to collect Council Tax due. However, there will be limited circumstances when it is appropriate to either write off the debt, or consider the write off of monies owed to the Council. Some of this is covered by statute or an instruction by the courts (remission) and other areas will be considered by local management in accordance with agreed policy.

3.3 Where such circumstances occur, and all avenues of recovery have been exhausted, the

debts are referred to the Director of Corporate Services with a recommendation of writing off the debt. The Director of Corporate Services (under authority delegated to

Item 10

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the Section 151 Officer for the Council), will authorise the debts for write off as appropriate.

3.4 Members will be re-assured the Council follows set legislation and guidance when billing

for Council Tax. The collection process is highlighted below:

o Serve a demand notice (bill) o Serve an instalment reminder notice and/or a second reminder notice. o Serve a final notice o Make a complaint to Magistrates and issue a summons to attend a Liability Order

Hearing. o Make an application for a Liability Order before the Magistrates o Serve a notice of Liability Order and request for information as to income details. o Attach to Earnings or Benefit where income details are known. o Where income details are not known, pass the Liability Order to an Enforcement Agent

to obtain payment or to take control of goods for possible sale. o Recycle the case to a second Enforcement Agent if the first is unsuccessful.

If arrears are in excess of £3,000 the case is passed to the Court Officer who will:

o Visit the taxpayer at their home. o As a last resort consider prosecution in the Magistrates Court for failing to provide

requested information with regards to income. o Consider applying for a Charging Order where the arrears are in excess of £1,000 and the

taxpayer is the home owner. o Consider a petition for bankruptcy where the arrears are in excess of £5,000 and the

taxpayer has likely assets in excess of £20,000 (usually a home owner). o Finally serve a pre-committal letter on the taxpayer informing the Council may consider

committal proceedings against them to recover the arrears.

It is only when the above steps have been followed and all options investigated that the debt is considered for writing off.

4. COUNCIL TAX DEBT NOMINATED TO BE WRITTEN OFF DURING THE CURRENT

FINANCIAL YEAR 4.1 As advised in the Governance report in December 2014 Officers are continuing their

ongoing review of aged debt. This has resulted in the amounts at point 4.3 below being recommended for write off.

4.2 Future years will see the Committee asked to endorse further write off sums as the

Service undertakes its ongoing reviews of each year.

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4.3 Yearly amounts written off

Fin Year Balance

1999-00 £50.75

2000-01 £881.44

2001-02 £3,028.03

2002-03 £2,543.02

2003-04 £5,142.14

2004-05 £5,926.72

2005-06 £10,525.65

2006-07 £14,357.61

2007-08 £19,628.29

2008-09 £24,463.42

2009-10 £25,303.54

2010-11 £27,821.04

2011-12 £39,289.55

2012-13 £79,483.63

2013-14 £131,277.95

2014-15 £135,740.25

2015-16 £100,392.02

2016-17 £44,639.65

2017-18 £29,458.28

2018-19 £532.23

Grand Total £700,485.21

5.1 Members are asked to note

a) The debt approved for write-off under delegated procedure by the Director of Corporate Services.

6. BACKGROUND PAPERS No background papers

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WARRINGTON BOROUGH COUNCIL

AUDIT AND CORPORATE GOVERNANCE COMMITTEE – 17 JANUARY 2019

Report of the: Director of Corporate Services Report Author: Danny Mather, Corporate Finance Manager Contact Details: Email Address:

[email protected] Ward Members: All

Telephone: 01925 442344

TITLE OF REPORT: APPROVAL OF NATIONAL NON DOMESTIC RATES 1 (NNDR1) FORM

1. PURPOSE 1.1 The purpose of this report is to seek member approval of the council’s 2019/20

National Non-Domestic Rates forecast that is incorporated into the National Non- Domestic Rates Form 1 (NNDR 1 Form).

1.2 The NNDR1 Form is to be approved by members and returned to the Government by

31 January 2019. Full Council, at its December 2012 meeting, delegated responsibility for the approval of the NNDR1 Form to the Audit & Corporate Governance Committee.

1.3 The Government is expected to issue the forms on December 14th. Although, the

principles of the form will be discussed in this report, it is requested that Audit & Governance Committee delegate the authorisation of the NNDR1 form to the Director of Corporate Services and the Executive Board Member for Corporate Finance.

2. CONFIDENTIAL OR EXEMPT

2.1 This report is not confidential or exempt.

3. INTRODUCTION AND BACKGROUND

3.1 Since the National Non-Domestic Rates scheme began on 1 April 1990 Business

Rate income has been paid to Central Government and redistributed as Formula Grant. The rates collected had no impact on the funding received by the council and each Local Authority collected money on behalf of Central Government.

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3.2 Following the Royal Assent of the Local Government Finance Act on 31 October 2012, the Business Rate Retention Scheme was implemented on the 1 April 2013. In principle the scheme allows Local Authorities to keep 50% of the Business Rates Income with 50% being paid to Central Government.

4. HOW DOES THE BUSINESS RATE RETENTION SCHEME WORK? 4.1 For single tier authorities Business Rate income will be split as 50% to Central

Government, 49% to Local Authorities and 1% to Fire Authorities as shown below:

4.2 To redistribute business rates evenly across all Local Authorities the initial income

levels are then adjusted though Top Ups and Tariffs so that the income received reflects the needs of each authority.

4.3 The Top-Ups and Tariffs are calculated as the difference between the Business Rate

Baseline and the Baseline Funding Level. Where the Business Rate Baseline is below the Baseline Funding Level the authority will receive a Top Up, if it is above the Funding Level the authority will pay a Tariff.

Business Rate Baseline: Government estimate of Business Rates to be collected by each authority in 2013/14. This is allocated to each authority based on the average of the 2011/12 and 2012/13 rates collected.

Baseline Funding Level: Amount of Start Up Funding (formally Formula Grant) which is to be funded through the Business Rate Retention Scheme. The remainder of the Start Up funding is funded

334

through the Revenue Support Grant.

4.4 To protect an authority from an excessive drop in funding, if an authority’s Business Rate income falls by more than 7.5% below its funding level their income will be protected at this level. This is known as the Safety Net.

4.5 To pay for the safety net scheme, all tariff authorities are charged a levy on any income they receive over the Business Rate Baseline. The percentage payable is shown in the calculation below:

Levy Rate = Tariff Payable Business Rate Baseline

4.6 The Baseline Funding Level and the Business Rate Baseline will be increased by RPI

each year, and this scheme will not be amended until the scheme is due to be reset in 2020.

5. BUSINESS RATES OUTTURN ESTIMATE FOR 2018/19

5.1 Local Authorities are required to estimate the year-end outturn position on the

Business Rates scheme in January each year. Appendix 1 shows Warrington’s Period 8 estimate against the estimates taken from last year’s NNDR1 return.

5.2 This shows that Warrington are estimating a surplus (for levy calculation purposes)

on the Business Rates £463k.

Appeals Provision 5.3 As part of the Business Rate Retention Scheme, local authorities are liable for any

business rate appeals payments made since 1 April 2013, and each authority is required to set up a provision for the estimated cost of any appeals outstanding at the end of the financial year. The current level of appeals that the council provides for is £15.210m.

6. BUSINESS RATES FORECAST 2019/20 (NNDR1 FORM)

6.1 Under the new Business Rate Retention system, local billing authorities are

required to prepare and submit to CLG a locally determined and approved business rates forecast though an NNDR1 Return by 31 January each year. This forecast will be used to determine the 2019/20 payment schedule for Business Rates between billing authorities, central government and precepting authorities.

6.2 If the council’s share of the forecast is different to Warrington’s Baseline Funding Level then there are financial implications for the 2019/20 budget process. A

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forecast lower than the baseline funding level will increase the cumulative savings requirement, whereas a higher forecast will reduce it.

Appendix 2 shows Warrington’s forecast outturn for 2019/20. The Director of Corporate Services will sign off the NNDR1 by 31 January in discussion with the Executive Board Member for Corporate Finance. Any major variation between the estimates included in this report and the final return will be reported to Audit & Governance Committee on 13 February 2019.

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7 BUSINESS RATE POOLING 7.1 To encourage local authorities to work together and to support economic priorities

across the area, local authorities have the ability to pool their business rate income.

7.2 For pooled authorities the Business Rate Baseline and Funding Level will be

calculated as the aggregate of the individual authorities. This can benefit the pool by reducing the levy payable and enabling the pool as a whole to keep up to 49% of any Business Rate growth. This could also be a risk as the Safety Net Payment would be calculated as 7.5% below the baseline of the aggregated pool.

7.3 Pooled authorities are expected to border each other and the pool should benefit

‘local authorities and the Government’s wider objectives for growth, and improved strategic and service delivery’.

8 MID-MERSEYSIDE POOL – WARRINGTON, HALTON & ST HELENS

8.1 Warrington, Halton and St Helens are part of the Mid Merseyside Pool as of 1

April 2014. The benefit of being part of a Pool is that the member authorities would be able to keep 49% of any growth, compared to 27% if an authority were on its own.

8.2 The risk of the pooling arrangement is the safety net payment. Any authority entering

the safety net would need to be paid by the other members of the Pool.

Estimates 8.3 Our current estimates for Warrington show a possible levy payment to the Pool.

However, this could easily change with any last minute submissions for appeals.

8.4 Both authorities have been informed of our estimates and we are currently in discussion whether to continue with the Pool.

8.5 There are two further factors that will affect the future of the Pool. The first is the move towards 100% Business Rates Retention that will see the abolition of the levy payments and therefore remove the current benefit of the Pool. The second is that Halton and St Helens are part of the Liverpool City Region Pilot for 100% Business Rates Retention.

9. CHESHIRE SCIENCE CORRIDOR ENTERPRISE ZONE

9.1 On 25th November 2015 the government has announced 18 new Enterprise Zone including the Cheshire Science Corridor Enterprise Zone (EZ). The EZ came into effect from 1st April 2016.

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9.2 The EZ spans across three authorities: Cheshire West and Chester, Cheshire East, and Warrington. It incorporates four distinct areas: Alderley Park, Birchwood Park, sites in Ellesmere Port, and Thornton Science Park.

9.3 Businesses within the EZ area are allowed to apply for a business rate discount up to £275,000 over a five year period, and the sites within Ellesmere Port also offer Enhanced Capital Allowances where occupiers are able to write down the costs of qualifying plant and machinery assets against their taxable income.

9.4 All business rates growth within the zone, above a legislatively set baseline, for a period of 25 years will be retained by the Warrington and Cheshire LEP, to support the Partnership’s economic priorities and ensure that Enterprise Zone growth is reinvested locally.

9.5 As at Period 8, the Enterprise Zone at Birchwood Park is not forecasted to produce any business rates above the baseline.

10. FINANCIAL CONSIDERATIONS

10.1 Due to the nature of the report, the financial implications are contained throughout

the report. 11. RISK ASSESSMENT

11.1 A full risk assessment has been undertaken and a project group set up consisting of

accounting, revenue and benefits, and estates and planning officers for the completion and monitoring of the NNDR1 Form.

12. EQUALITY AND DIVERSITY / EQUALITY IMPACT ASSESSMENT

12.1 The Finance Service undertakes equality impact assessments (EIA) in its wider

functions. 13. CONSULTATION

13.1 N/A

14. CONCLUSION

14.1 The figures included in this report are only estimates pending the distribution of the

final NNDR1 form and guidance notes. As the form needs to be signed by the Director of Corporate Services by 31 January 2018 it is requested that Audit & Governance Committee note the figures included in this report but delegates the authorisation of the NNDR1 form to the Director of Corporate Services and the

338

Executive Board Member for Corporate Finance. Any major variation between the estimates included in this report and the final NNDR1 will be brought to the next Audit & Governance Committee on 13 February 2019.

15. RECOMMENDATION

15.1 Audit & Governance Committee to delegate the authorisation of the NNDR1 form to the Director of Corporate Services and the Executive Board Member for Corporate Finance.

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Name E-mail Telephone Danny Mather [email protected] 01925 442344

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Appendix 1

2018/19

NNDR1

£'000

Period 8

Estimate

£'000

Variance

£'000

Business Rates Income before reliefs and appeals -116,824 -111,535 -5,289

Less:

Transitional Protection 0 0 0

Mandatory Relief 7,187 6,143 1,045

Unoccupied Property 1,267 0 1,267

Discretionary Relief 1,076 5,915 -4,840

Discretionary Relief Funded Through S31 Grants 143 0 143

Movement in Bad Debt Provision 500 -91 591

Appeals Estimate 2,237 4,691 -2,453

Cost of Collection Allowance 296 296 0

Non-Domestic Rating Income -104,118 -94,583 -9,536

Business Rate Split

Central Government (50%) -52,059 -47,291 -4,768

Warrington Borough Council (49%) -51,018 -46,345 -4,673

Cheshire Fire Authority (1%) -1,041 -946 -95

Add:

Section 31 Grants -3,084 -1,505 -1,579

Tariff/(Top Up) 16,390 16,390 0

Warrington Borough Council's Share of Business Rate Income -37,712 -31,460 -6,251

Baseline Funding Level for Warrington Borough Council -30,137 -30,137 0

(Surplus)/ Deficit -7,575 -1,323 -6,251

Safety Net Threhold -27,877 -27,877 0

Levy Payable -2,651 -463 -2,250

Safety Net Funding Payable 0 0 0

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Appendix 2

2019/20

Estimate

£'000

Business Rates Income before reliefs and appeals -113,766

Less:

Transitional Protection 0

Mandatory Relief 6,266

Unoccupied Property 0

Discretionary Relief 6,034

Movement in Bad Debt Provision -93

Appeals Estimate 4,784

Cost of Collection Allowance 301

Non-Domestic Rating Income -96,474

Business Rate Split

Central Government (50%) -48,237

Warrington Borough Council (49%) -47,272

Cheshire Fire Authority (1%) -965

Add:

SBRR Section 31 Grant -1,535

Tariff/(Top Up) 16,754

Warrington Borough Council's Share of Business Rate Income -32,053

Baseline Funding Level for Warrington Borough Council -30,806

(Surplus)/ Deficit -1,247

Safety Net Threhold -28,495

Levy Payable -437

Safety Net Funding Payable 0

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WARRINGTON BOROUGH COUNCIL AUDIT AND CORPORATE GOVERNANCE COMMITTEE – 17 JANUARY 2019 Report of the: Director of Corporate Services

Report Author: Danny Mather, Corporate Finance Manager Contact Details: Email Address:

[email protected]

Telephone: 01925 442700

Ward Members:

All

TITLE OF REPORT: 2019/20 COUNCIL TAX BASE

1. PURPOSE 1.1 The purpose of this report is to set out the calculation of the council’s tax base for

2019/20. The council is legally required to determine its tax base for council tax purposes by 31 January 2019.

1.2 The responsibility for setting the Tax Base has been delegated to the Audit &

Governance Committee since the 2008/09 tax base was set in December 2007. 1.3 This report explains how the tax base is to be calculated and recommends the 2019/20

figures to be used for council tax setting. 2. CONFIDENTIAL OR EXEMPT 2.1 Not confidential 3. INTRODUCTION AND BACKGROUND 3.1 The tax base is defined as the number of band D equivalent properties within a local

authority which will be liable to pay council tax in the forthcoming year. This is used by Warrington Borough Council to establish the council tax for 2019/20 and is used by Cheshire Police, Cheshire Fire and the parish councils to set their precepts.

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4 CALCULATION OF TAX BASE

4.1 As at 10th September 2018, there were 92,895 domestic properties in Warrington. These have been valued by the Valuation Office Agency (VOA) and placed in one of eight bands (from A to H) according to the price at which the property might reasonably have been sold on the open market on 1st April 1991. The number of properties is adjusted for discounts and exemptions and is then converted to a number of band D equivalent properties by using a common ratio (defined in regulation 5 of the Local Authorities Calculation of Tax Base Regulations 1992), e.g. for band A multiply by 6 and divide by 9. This is detailed in the table below:

4.2 To calculate the tax base for 2019/20, the 75,552 band D equivalent properties identified

in the above table have been adjusted to reflect the following:

An increase of 72 dwellings to reflect the anticipated number of new dwellings that will be completed during 2019/20 (2018/19 - 48).

A decrease of 729 dwellings to cover potential non-collection rate of council tax for the 2019/20 financial year (1% non-collection rate assumed) (2018/19 – 754).

4.3 These adjustments result in the calculation of a tax base of 74,895 for 2019/20, which is

an increase of 96 from last year (2018/19 – 74,803).

Value Range

Number of

Dwellings after

Discounts and

Exemptions Ratio

Band D

Equivalents

Up to £40,000 29 5/9 16

Up to £40,000 23,310 6/9 15,540

£40,000 - £52,000 18,415 7/9 14,323

£52,000 - £68,000 17,563 8/9 15,611

£68,000 - £88,000 10,991 9/9 10,991

£88,000 - £120,000 6,847 11/9 8,369

£120,000 - £160,000 4,260 13/9 6,154

£160,000 - £320,000 2,519 15/9 4,199

£320,000 and over 176 18/9 350

84,110 75,552

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5. COUNCIL TAX TECHNICAL CHANGES Council Tax Support Scheme 5.1 Since 1st April 2013 Warrington has no longer received funding from Central

Government for council tax benefit and a new Council Tax Support Scheme was agreed by Executive Board on 17th December 2012.

5.2 Due to the way the scheme operates, this has a direct effect on the council tax base.

Previously any properties liable for council tax benefit were included in the tax base figures (as the funding was received directly from Central Government). As part of the Council Tax Support Scheme anyone receiving full council tax support will be exempt from payment, and we therefore need to adjust our tax base accordingly.

5.3 In the meeting of 17 December 2012, it was agreed that council tax support would still

be provided to those previously in receipt of council tax benefit, although, for those of working age, this will be restricted to a Band A equivalent.

5.4 The tax base 74,895 therefore needs to be adjusted to remove the tax base relating to

the current benefit scheme and to add the tax base relating to the additional income from residents liable to support who live in Band B properties and above.

Effect on the Tax Base

5.5 The final tax base for Warrington Borough Council following technical changes is shown below:

6. PARISH TAX BASES FOR 2019/20

6.1 At the 27th February 2018 Full Council meeting, the Council took the decision to pass the

cost of Council Tax Support Allowance (CTSA) to the Parish Councils. Thus the Parish Councils have had their respective tax bases reduced in line with the number of hereditaments claiming CTSA in that Parish. This decision saves the Council £207,000 a year.

6.2 A list of the Parishes, the proposed tax base for 2019/20 and the variance from 2018/19

is shown below:

Tax Base 74,895

Less: Tax Base relating to Council Tax Benefit -7,003

Total 67,892

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7. FINANCIAL CONSIDERATIONS 7.1 Assuming there will be a 2.98% increase in council tax in 2019/20 (2.98% council

precept), each extra Band D equivalent property added to the tax base will result in additional income to the council of £1,436.15 per property. Therefore the increase of 400 Band D equivalent properties will result in additional council tax income of £574,460 in 2019/20.

8. RISK ASSESSMENT 8.1 The tax base calculation is a prediction of the number of band D equivalent properties

that will be liable to pay council tax during 2019/20. An incorrect estimate could result in Warrington Borough Council having to declare a deficit for 2019/20, which would add an additional budget pressure to the 2020/21 financial year.

8.2 Warrington Borough Council declared a surplus £1,200,000 position in 2017/18, and

based on the Period 8 estimate a deficit of £750,000 is being forecasted in 2018/19.

Parish Council 2018/19 2019/20 Movement

Appleton 5,057 4,866 -191

Burtonwood 3,969 3,743 -226

Birchwood 3,602 3,086 -516

Croft 965 923 -42

Cuerdley 47 45 -2

Culcheth 3,575 3,345 -230

Grappenhall 4,017 3,860 -157

Great Sankey 10,522 9,915 -607

Hatton 167 156 -11

Lymm 5,615 5,379 -236

Penketh 2,859 2,674 -185

Poulton 5,633 4,973 -660

Rixton 779 744 -34

Stockton Heath 2,551 2,414 -136

Stretton 389 378 -11

Walton 769 754 -15

Warrington (Unparished) 19,993 16,618 -3,374

Winwick 1,857 1,725 -133

Woolston 2,438 2,291 -146

Sub-total 74,803 67,892 -6,911

Technical Changes -7,311 0 7,311

Total 67,492 67,892 401

Tax Base

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9. EQUALITY AND DIVERSITY / EQUALITY IMPACT ASSESSMENT 9.1 The Finance Service undertakes Equality Impact Assessment in its wider functions. 10. CONSULTATION 10.1 None 11. REASONS FOR RECOMMENDATION 11.1 The council is legally required to determine its tax base for council tax purposes by 31st

January 2019. 12. RECOMMENDATION

12.1 That the council approves the setting of the tax base for 2019/20 at 67,892, and the tax

base for the parish councils shown in 6.2 above. 13. BACKGROUND PAPERS Contacts for Background Papers:


Danny Mather [email protected] 01925 442344

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Grant Thornton UK LLP 4 Hardman Square Spinningfields Manchester M3 3EB T +44 (0)161 953 6900

F +44 (0)161 953 6901

Dear Lynton

Certification work for Warrington Borough Council for the year ended 31

March 2018

We are required to certify the Housing Benefit subsidy claim submitted by Warrington Borough Council

('the Council'). This certification typically takes place six to nine months after the claim period and

represents a final but important part of the process to confirm the Council's entitlement to funding.

The Local Audit and Accountability Act 2014 gave the Secretary of State power to transfer Audit

Commission responsibilities to other bodies. Public Sector Audit Appointments Ltd (PSAA) took on the

transitional responsibilities for HB COUNT issued by the Audit Commission in February 2015.

We have certified the Housing Benefit subsidy claim for the financial year 2017/18 relating to subsidy

claimed of £43 million. Further details are set out in Appendix A.

In accordance to HB COUNT methodology we completed addition testing on an error identified in

2016/17 no further issues have been identified from our certification work which we wish to highlight for

your attention.

The indicative fee for 2017/18 for the Council was based on the actual 2015/16 certification fees,

reflecting the amount of work required by the auditor to certify the Housing Benefit subsidy claim that

year. The indicative scale fee set by PSAA for the Council for 2017/18 was £7,652. This is set out in

more detail in Appendix B.

Yours sincerely

Gareth Winstanley

Grant Thornton UK LLP

Mr Lynton Green

Deputy Chief Executive and Director of Corporate Services

Warrington Borough Council

Town Hall

Sankey Street

WA1 1UH

4/1/19

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Grant Thornton UK LLP. 2

Appendix A - Details of claims and returns certified for 2017/18

Claim

or

return

Value Amended Amendment

value

Qualified

Comments

Housing

benefits

subsidy

claim

£43,353,315 Yes - No 1 case was

identified with

benefit totalling

£22 which had

been included

within the rent

rebates section of

the return, rather

than included

within the rent

allowance section.

There was no

impact on subsidy.

350

Grant Thornton UK LLP. 3

Appendix B: Fees for 2017/18 certification work

Claim or

return

2015/16

fee (£)

2017/18

indicative

fee (£)

2017/18

actual

fee (£)

Variance

(£)

Explanation for

variances

Housing

benefits

subsidy

claim

(BEN01)

£7,652 £7,652 £7,652 -

Total £7,652 £7,652 £7,652 -

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Agenda Item/Report Section 24/05/18 26/07/18 16/10/18 17/01/19 07/02/19 20/03/19 11/04/19

TRAINING xINFORMAL MEETING WITH

IA/XAx

Produce annual report of the

Audit and Corporate

Governance Committee (to

Full Council)

Chair

x

Review of effectiveness of the

Audit and Corporate

Governance Committee –

complete self assessment

Committee

Working Partyx x

Review Audit and Corporate

Governance Committee work

programme

Democratic

Services x x x x x x x

Review Audit and Corporate

Governance Committee

training requirements

Legal & AuditX within self

assessment x

Ombudsman Complaints

2017/18Legal

x

Election Fees and Charges Legal

Review of the Audit and

Corporate Governance

Committee’s terms of

reference

Legal

X within self

assessment

Review (draft) Annual

Governance Statement (AGS)

Governance Group

&CIA x x

Audit & Corporate Governance Committee Work

Item 14

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Review reports from

Governance Group and

implementation of AGS action

plan items

Governance Group

&CIAx x

Review of strategic risk

registerCIA

x x x

Review annual Risk

Management report CIA

x

Review of Code of Corporate

GovernanceCIA & Legal

x

Review of final statement of

accountsFinance

x

Management letter of

representationFinance

x

Write Offs of Irrecoverable

DebtFinance

x x

Treasury management

strategyFinance

x

Treasury management

quarterly monitoring report

Finance

x X half

year reportx

Treasury management

practices statement

Financex

Annual Treasury Outturn

Report

Financex

Approval of National Non

Domestic Rates Form 1

Financex

Approve Council Tax base Finance xApprove Accounting Policies Finance

x354


Annual report of the Chief

Internal Auditor on the system

of internal control.

CIA

x

Review the effectiveness of

Internal Audit / compliance

with the Code of Practice

Committee

x

Review of External Audit Committee

Review annual internal audit

plan

CIAX draft X final

Internal audit monitoring

reports including monitoring

of implementation of

recommendations

CIA

x x x x

Review Anti-fraud bribery and

corruption strategy

CIA & Solicitorx

Anti-Fraud, Bribery and

Corruption 6 monthly report

CIAx x

Regulation of Investigatory

Powers report & grant of

authorisations

LegalX through

training

Agree External Audit plan External Audit xGrant Thornton - agreement

of Fees

External Auditx

External Audit Update -

including responses to

Challenge Questions

External Audit &

Finance x update

only x x x

Annual Findings Report External Audit xAnnual Audit Letter External Audit x

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Certification of claims and

returns

External Auditx

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Audit and Corporate Governance Committee

Documents

Transcript of Audit and Corporate Governance Committee